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Being able to save money is the key to future financial success. From a deposit for a home, to car financing and paying for holidays, savings come in very useful indeed. Despite this, many of us find it hard to save. Given the squeeze on so many household budgets, the rise in the cost of living and low interest rates, incentives to do it can seem few. However, once you accumulate savings you give yourself the freedom to make financial decisions. So, if you’re looking to get the most out of your savings what are your options?
This ‘option’ could be under the bed, in a shoebox, stuffed in a sock etc. For those who don’t trust banks with their cash this is often the first choice. The advantage of saving in this way is that you have complete control. However, there are many disadvantages too. You won’t earn any interest on cash that you keep under the bed and there is no official record of it. Cash that is ‘out of the system’ in this way won’t contribute to creating a positive financial profile. Plus, you’re very vulnerable to loss or theft.
ISAs have the advantage of being tax free savings. Anyone over the age of 16 can access an ISA and save for free. ISAs are subject to annual limits and for this tax year it is £15,240. ISAs are a really simple way to save as you simply pay the money in and then earn interest while it’s there. ISAs come in various different formats – for example, you could have a better interest rate for an ISA with less easy access. The best way to find an ISA that works for you is to shop around with different banks and finance organisations. Look for differences in interest rates and flexibility.
If the purpose of your savings is to buy a property then the Help to Buy ISA is a great option. Open to first time buyers, it provides savers with a bonus of 25% paid for by the government, to put towards the cost of your first home. There are no limits on the number of Help to Buy ISAs per household so if you’re buying with a friend or partner both of you can open one and benefit. Deposit £1,200 in the first month and then £200 a month after that. Save up to £12,000 and you’ll receive the maximum government bonus of £3,000.
With the arrival of the Personal Savings Allowance (PSA), a simple savings account has become a competitor to the ISA. The PSA means that anyone can now save without paying tax on savings interest – up to specific limits. So, basic rate taxpayers (20%) can earn up to £1,000 interest a year and won’t have to pay any tax on it. Higher rate taxpayers (40%) can earn up to £500 in interest a year without pay tax. Unfortunately if you’re paying the top rate of tax (45%) then you will always pay interest on your savings. The introduction of the PSA has made a savings account a much more attractive option for many people, particularly as some savings accounts offer better interest rates than ISAs.
While the PSA has made savings accounts an option again on the tax front, not all savings accounts are created equal. You can find interest rates of up to 5% by shopping around but some offer much less. It’s worth bearing in mind that the best deals on savings accounts are usually offered to those who are willing to deposit cash and then leave it there. These low access accounts mean that you don’t have easy access to your money but you will get higher rates of return. Online savings accounts are also another good option for better interest rates. The lower overheads of an online service often mean that they can offer a better deal.
While saving with credit unions is much the same as with banks or building societies, credit unions may be a better option if you have less to save. Plus, if you save with a credit union then you can have access to very low-interest personal loans usually available only to members.
Investing is not strictly a form of saving as there is a much higher level of risk involved. However, if you’re willing to take that on then investing in stocks and shares can generate some solid returns. Basically, when you invest, you pay a company for one of its shares. If the company does well then what you bought is worth more, if it does badly then the value drops. If you’re willing to dedicate your cash for at least five years then investments can be a good short term savings option.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read about Alex Hartley
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