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How to make the most out of your savings

How to make the most out of your savings

With rates getting higher, are you making the most out of your savings? Andy Webb shares his advice for maximising what you earn on your cash

For a long period recently, savings rates were so poor they were almost not worth bothering about (almost). And that might have meant you’ve neglected them, leaving them languishing in accounts that pay very little, if anything at all.

"These steps will help you get the best possible savings rate and earn some much needed extra cash"

But this year has seen some massive hikes on what you can earn on your cash. Even though they’re still way below the rate of inflation, the successive Bank of England base rate increases mean it’s now possible to get decent returns. 

These steps will help you get the best possible savings rate and earn some much needed extra cash. 

Find the best rates 

The first step is to look at what you’re getting right now. If you’ve not moved your money for a while then it’s likely you are on a poor rate. Even though some banks might have automatically increased their rates for existing customers, don’t assume you can’t beat them. 

Savings

Commpare what youre currently earning to what’s available elsewhere. To find the best alternatives, I use the moneyfacts website, and also provide updates on becleverwithyourcash.com/savings.  

Choose the right type of account 

There are a number of different types of account so you need to decide which type best suits you. The most common are easy-access accounts. These will usually pay less than other options but you can withdraw your money whenever you want. 

If you don’t need to use it for long periods you could look at fixed bonds, usually running from six months to four or five years. Be careful of fixing for too long right now. Though you’ll get much higher rates, your cash is locked away for the duration. And since we’re expecting further interest rate rises, it could be you miss out on better rates down the road. Of course, you need to balance that with getting a better rate right now. 

"There are a number of different types of account so you need to decide which type best suits you"

Regular savings accounts are also worth considering for new deposits you’ll make each month. You’ll get a decent rate with some of these accounts, though often you can’t access the money for a year. 

The best rates might well be reserved for current account customers. That’s not an issue as you will be able to open up these accounts even if you already bank elsewhere (it’s fine to have more than one account). 

Premium Bonds are a different type altogether, and a return isn’t guaranteed. The more you save in them the more likely it is you’ll win a prize, but at current rates it’s unlikely you’ll beat the best paying easy-access accounts. 

Calculate if you’ll pay tax 

You might be of a mind that an ISA is best. Interest earned here is tax-free so you get to keep all of it. But if you’re a basic rate taxpayer you’ll be able to earn £1,000 tax-free in any savings account thanks to the Personal Savings Allowance (PSA). Higher rate taxpayers have a reduced allowance of £500, while additional rate taxpayers don’t get one (though they will when this rate is scrapped from April next year). 

Tax

Above these allowances you pay tax, so if you earn £1,050 interest in a year you’d pay 20 per cent tax on the £50. You can avoid this by planning ahead and moving money into an ISA (though do compare if the ISA rate is better even when tax is taken into account). 

As rates improve your PSA will fill up faster, but for the time being, they should remain big enough for most. One quick warning—if you fix and the interest is paid annually rather than monthly, the total amount will count towards that year’s allowance. That will really add up for fixes of two or more years. 

Check how to open and manage the account 

Once you’ve decided on your new account (or more), it might seem like common sense to go for the one with the highest interest rate. But there might be restrictions that don’t suit you.  

It’s likely the account will have minimum deposits that can range from £1 to £10,000, if not more. There will be maximums too. So you could be ruled out from opening these if you don’t have enough cash.  

"If you want to use a branch, then you’ll probably be looking at a lower rate"

Plus, many of the best paying accounts are now online only and some even require you to use an app. If you want to use a branch, then you’ll probably be looking at a lower rate. 

Are you saving too much? 

You want to avoid having more than £85,000 in any account as that’s the limit protected by the Financial Services Compensation Scheme. If you split money across banks, be careful here that these banks aren’t part of a larger banking group which shares this amount across accounts. 

But really, £85,000 is likely too much to have in savings. For most of us, we only really need to have money available to cover emergencies, or for any forthcoming large spends. 

Emergency fund

The rule of thumb for the emergency fund is to have three to six months of essential expenses available in case you stop earning, though you might be more comfortable with slightly more. Don’t forget to factor in increased costs on bills and mortgages. You’ll want this to be in an easy-access account so you can get hold of it immediately if the need occurs. 

Above this you really only need to have money for planned spending—anything from a new coat or a holiday, to Christmas or a kitchen. You can even save these in separate accounts as many providers will let you have more than one. If not, you can open up additional accounts with different banks. 

If there’s still substantial sums left over then you’re likely better off putting this into longer term products like investments, your mortgage or your pension. In theory you should get better returns on money in these places—though there’s the risk with some that the value of money you put in could instead fall. 

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