Where should I put my short-term savings?
1st Jan 2015 Managing your Money
Having emergency money set aside can be a lifesaver when you're faced with unexpected costs. But where is the most sensible place to keep your emergency pot? Read on…
What should I be saving for?
It’s a good idea to have some money set aside for emergencies and unforeseen events. That way, if your car breaks down or your washing machine needs replacing, you won’t have to borrow money to sort the problem out.
As a medium-term goal, it’s also helpful to have around six months’ worth of household expenses and outgoings saved up in a deposit account. This will cover you if you lose your job, are unable to work, or are ill.
The money should be in an account which allows you to get your money relatively quickly. However, in the current low-interest rate environment, easy access usually means low returns. So we’ve looked at six possible homes for your short and medium term money and listed their pros and cons.
1. Instant access cash deposit
This is the place to put your emergency money. Ideally, it should be three to six months’ worth of outgoings. You might need to get to this cash quickly, so don’t put it in an account which penalises you for withdrawals.
The best place is a cash savings account, either with your own bank or building society if they offer you a preferential rate, or online where you’ll find the most competitive deals.
- Pros: easy to access
- Cons: low-interest rate, if any
2. Regular savings account
Usually, this will lock you in for 12 months and require you to contribute every month. On the plus side, it offers the discipline of regular saving and good interest rates.
There is usually a minimum and a maximum amount you can save each month, and you can get your money in an emergency although you’ll forfeit any past or future interest if you withdraw it early.
- Pros: imposes good savings discipline and offers reasonable rates
- Cons: you can only save small amounts and you need to check the terms and conditions carefully
3. Notice account for your savings
For money which you are saving for the medium term, you could consider an account with a three month, six month or one year notice period.
You’ll get a slightly better rate the longer you commit your funds.
- Pro: better rate of interest
- Cons: money is tied up for longer and notice periods of three months or more apply to cash that you wish to withdraw
4. One year, two-year, three-year savings bonds
If you have sorted out an emergency fund and you now want to build up money for a medium-term goal, for example, a house deposit or new car, then you could opt for a savings bond. This is a savings account that ties your money up for a minimum period and rewards you with a slightly higher rate of interest. They are available from banks and building societies.
- Pros: interest rates will be higher than instant access accounts
- Cons: With interest rates at a general low level, the rewards for putting your money away for three years won’t be significantly greater than saving for just one year
5. National Savings and investments: Premium Bonds
These are suitable for savers who have £100 or more to invest. They are run by the government and so are 100% secure. They offer the chance to win tax-free prizes, including a £1 million jackpot.
- Pros: safe, secure and the possibility of winning a prize
- Cons: They don’t provide a regular income or guaranteed returns, and there is no guarantee that you will win a prize
6. Bank current account savings
Some current accounts pay interest on credit balances. You’ll need to have a current account open with them, and there are usually terms and conditions that you have to meet. However, their interest rates are often better than those on instant access accounts plus you will be able to get your money if and when you need it.
For example, the Santander 123 account offers cash back and credit balance interest, but you have to pay a monthly fee.
Bank of Scotland requires you to pay in £1,000 a month and register for its Vantage add-on account in order to qualify for credit balance interest.
- Pros: good interest rates
- Cons: you are committing to a current account and not just a straightforward savings account
For longer term savings you could consider an Individual Savings Account, into which you can put up to £15,240 in cash. When looking for best buy interest rates shop around at Moneyfacts.co.uk and Moneysupermarket.com for the best rates.
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