Most people have a financial dream for the future; however, not everyone has a plan in place to make those dreams a reality. It can be difficult to work out how to make your savings work towards achieving your goals, particularly if you want to grow your money without exposing it to the risk of market change that can occur when investing in shares or other investment products.
Defining your savings goals
Before you can work out which is the best savings account for you, you should first understand your goals. Do you have short-term goals, like saving up for your next holiday? Or perhaps you just want to create the convenience and security of a “cushion” to give you peace of mind that you have money available to spend as and when the need arises?
Perhaps you're motivated by longer-term goals such as extensive home improvements or you’re thinking about retirement. Or you might be considering a broader savings and investment strategy. Whatever the case, the type of savings account that's right for you will depend on your goals.
If you want to build your savings for a one-off lump-sum purchase – such as a house deposit or to pay for a loft conversion – you'll probably want to grow and protect your money, but you might also need access to it at any time. And yes, it's possible to do all these things by spreading your savings across different accounts so that you have the balance of returns, flexibility and tax efficiency that is right for you.
It’s about choosing the right amount of your money and knowing where to save it.
Greater flexibility or greater returns?
As a general rule, if you’re prepared to put your money into a savings account for a set period of time, you will receive a better interest rate and greater returns. However, these types of accounts tend to offer lower levels of flexibility, which may mean you can't access your money before the end of the fixed term, so they're a better choice for money you know you won't need to access for a while.
Easy access savings accounts might offer greater flexibility for your money but they are likely to come with a lower interest rate - these are the ones to choose for the money you might want to withdraw with short notice. Against this backdrop it can be difficult to decide which account is best for you and your money.
Diversifying your savings
For many savers it doesn't have to be a question of “either-or”. If you have sufficient income and/or savings to develop a broader savings strategy, you can cater to both your short and long-term interests by investing in two or more types of accounts in order to enjoy the benefits of both. This approach is founded on one of the basic tenets of successful investment: diversification.
Diversification is the concept of spreading your money across different kinds of investments and savings products in order to reduce the possibility of “concentration risk” – in other words diversification helps protect you from the dangers of placing all your eggs in one basket.
Which savings products will work for you?
Sometimes it can be useful to look at different savings accounts as smaller parts of a broader “savings portfolio” i.e. having your money in a range of accounts to cater for your needs at the time or in the future, while helping you reach your savings goals.
Instant Access savings: An Instant Access account gives you immediate access to your money. You can make withdrawals whenever you like, without paying a fee or losing interest. Although interest returns from this account may be at the lower end, they will add up over time but will also allow you to enjoy a high level of access to your money.
Similarly, an Instant Access ISA gives you the ability to save a certain amount each year, enjoying the possibility of tax-free interest and the ability to access your money whenever you need to.
The yearly ISA allowance is currently £20,000. This means you can invest up to this amount in an ISA tax-free. There are certain restrictions in place that may affect your ability to diversify – for example, an individual can only open one cash ISA per year. This is why it is important to read our guide to ISAs or speak with an expert who can explain all the current ISA rules.
Fixed term savings: Fixed term savings accounts offer a potentially higher rate of interest. Accounts normally offer terms between 1 and 5 years for both ISAs and Bonds. Remember, these offer higher rates of interest than Instant Access accounts, but restrict your ability to access your money before the fixed term ends.
Notice Accounts: Notice accounts give peace of mind if you don't need instant access to your savings but would like to know you can access your money with a little advance planning. For example, a 100 Day Notice account allows you to choose whether to give the stated notice before taking money out of the account or withdraw with less notice and pay an interest penalty amount. Interest on this type of account is likely to be higher than instant access and lower than fixed rate accounts.
Tax treatment and rate of interest payable will depend on individual circumstances and may change in the future.
A savings case study
By spreading your money across longer-term fixed rate accounts and combining this with easy access accounts, you increase your ability to cater to your cash flow needs as well as benefitting from higher rates of interest. You'll be able to work out how much your money will have grown once the term ends – this can help you budget better and see how quickly you might reach your savings goals.
Here’s an example of how different savings accounts can be used for flexibility and growth:
Mrs Smith has £20,000. She’s looking to renovate her house in 2 years’ time.
She puts £10,000 in a 2 year bond. She’ll receive the best rate of interest for her money in this account, and be able to access it at the time she plans to use it.
She needs to be able to get to some of her money from time to time, so she puts £5,000 in an instant access account.
The remaining £5,000 is put into a notice account, so that it will receive higher interest than an instant access account, but the funds can be available after giving a period of notice, e.g 100 days.
At the end of the two years, Mrs Smith will be able to gain access to all her savings, three quarters of which will have benefited from higher interest earnings than if she had kept the whole sum in a standard savings or current account. If she needs to withdraw some of her savings during this two years, she can access what she has in her instant access account - while keeping the rest of it safely earning interest.
Talk to The Cambridge
Whether you’re already a member or someone who’s new to The Cambridge, why not talk to one of our experts about what to do with your savings. We can guide you through the different accounts so you can understand what we can do for you.
Visit your nearest branch or store or call us on 0345 601 3344.
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