It’s always a good idea to build up a fund of savings, or emergency fund, to meet any unexpected expenses and generally provide a bit of financial breathing space, and investment for our futures is becoming more and more important as uncertainty over pension arrangements in the long term grows. There are also compelling reasons to take savings seriously as the after-effects of the recent credit binge become ever more apparent.
So savings are a good idea – okay – but as with most things financial, things aren’t as simple as they seem at first. There are several different kinds of savings account on the market, and which one you choose depends on your financial circumstances and how you plan to save into the future.
Regular Savings Accounts
With regular savings accounts you commit to depositing an amount of money each month, either a fixed sum you decide on before you open an account or any amount within a range specified by the bank. These accounts often have attractive interest rates, as their limits on deposits mean that the total interest paid out is also limited and so the bank’s exposure is under control.
Regular accounts make sense for people with no capital to invest, but some surplus income each month. They can also work as part of a mixed strategy, with any capital invested in a long-term, high-interest account, and new deposits put into a regular saver to take advantage of the good rates.
These accounts don’t impose any kind of limits on deposits – within reason, you can deposit as much or as little as you like, whenever you have funds to invest. They make sense if you have some capital to invest but no fixed regular surplus income.
There are three kinds of deposit account, with different levels of access to your money:
Instant Access – With these, you can withdraw your money at any time, without losing out on any interest already earned.
Interest Penalty – No interest is paid for any month in which a withdrawal is made.
Notice Accounts – A specified number of days notice must be given before a withdrawal is made in order to avoid any interest penalties.
In general, the more restricted your access to your money, the better the interest rate you can expect to receive.
The final type of savings account we’ll look at is perhaps moving more into the realm of investment rather than savings per se, but as these accounts are offered by many mainstream banks they’re worth considering.
With a bond, you hand over a fixed sum of money which is locked away for a specified period of years, with no access allowed at all. At the end of the term, your initial investment will be refunded along with the return it’s made. Depending on the type of bond, this return will either be a fixed rate of interest, an interest rate tied to base rates, or the results of a stock market investment usually with a minimum guaranteed return.
These accounts are only really suitable for people with plenty of capital to invest, with no need to access the funds during the term, and who are looking for a good return without the uncertainty involved in other possibly higher yield types of investment such as shares.