Saving money is a fundamental part of any long-term financial planning, and much easier said than done – especially in today’s climate of rising prices and stagnant wages. If you are starting your savings journey, you might be anxious to start off on the right foot, and not quite sure how with the glut of savings accounts and financial products on the market. What is the secret to choosing the right one?
Before you start to delve into evaluating specific accounts, it is important to understand the specific reasons to why you are saving money. Are you planning to get onto the property ladder, or are you saving for retirement? Perhaps you’re saving for a holiday, or simply for a rainy day.
Identifying a core purpose for this tranche of savings is key to identifying the best financial product for you. For example, short-term savings need to be immediately accessible, while retirement savings would ideally be out of reach. With this in mind, can you narrow down your savings ambitions to one clear sentence?
One of the major factors to consider in choosing between savings accounts is interest. Interest rates can differ between account frameworks, making a direct comparison of accounts an extremely important part of the scouting process. Higher interest rates mean higher returns over time, but are often higher as a result of some trade-off – be it limited access to funds or heightened levels of risk.
The purpose of your saving plays a particularly important role here, as different forms of account can have drastically different rates of interest. For example, easy-access accounts have lower rates of interest in exchange for immediate access, which can be helpful for emergency funds.
Further to this, there are certain forms of savings accounts that require a fee to open or use. This fee would be a monthly one, deducted from the value of money kept within it. Account fees ensure the banking institution’s overheads are covered and are often rewarded with high rates of interest or tax exemption of savings. For the average saver, fee-based accounts should be avoided. But for the long-term saver with a large nest egg, that monthly account fee can be more than paid for in interest alone.
Accessibility has already been touched upon here but deserves closer scrutiny. There are accounts that limit access to money saved within them – typically due to higher levels of risk, but also unavoidably due to the institution’s primary way of generating interest.
Limited-access accounts allow banks to invest the money kept in them more effectively. Banks in part generate interest – and profit – by using deposited money to hedge other institutions or high-value loans. In waiving access to your money for a set period of time, your bank can invest your money with greater freedom, guaranteeing a higher rate of interest.
For the average earner, it is possible to think too hard about the nature of savings accounts. If you are looking for the best possible returns, all you need to do is find a savings vehicle with a high-interest rate and no fees. If you have large-scale long-term ambitions, then where you save is absolutely worth the scrutiny.