Two good reasons why saving is not a luxury
Last updated 14:39, Monday, 14 July 2008
Saving is often thought of as a luxury. After all, don’t we have enough demands on our cash without having to worry about the future?
But saving should be a priority – for two reasons. Firstly, you need emergency cash for those ‘what ifs’. What if the washing machine explodes? What if you lose your job?
Secondly, you need a nest egg for life’s big expenses such as house deposits or weddings.
And once you get into the savings habit, it’s surprising how quickly your funds build up and how secure it makes you feel. As Woody Allen remarked: “Money is better than poverty, if only for financial reasons.”
There are so many options now available to savers that it is difficult to know where to begin. What sort of account is best for you depends upon several factors – for example, how long you can tie your cash up for, how quickly you are likely to need access and whether you pay tax or not.
Instant access accounts are ideal for money you may need in a hurry. Your emergency fund should be in this type of account so that you can immediately meet any unexpected costs.
Some instant access accounts come with a cash machine card so you can get at your money 24 hours a day. There may be a limit on how much you can take out but it should be enough to cope with emergencies.
Traditionally, your savings earn a better rate of interest if you lock them away for some time. The compromise is that you cannot access your money immediately.
With notice accounts, you can only access your cash by giving notice. For example, a 90-day notice account requires you to wait three months to get your money. If you need it earlier, you pay a penalty.
Term accounts are an option if you are able to lock your money away for a longer period of time, for example, one or two years. Due to current market conditions, fixed-rate term accounts tend to offer a higher interest rate than variable-rate term accounts.
Cash Individual Savings Accounts (ISAs) are savings accounts where you earn tax-free interest, however, you are only able to deposit up to £3,600 each tax year.
While cash ISAs do not always offer the highest rates of interest in the savings account market, after tax you will find the best ones easily beat the higher-paying ordinary savings accounts. To compare rates, look at the gross rate paid on a cash ISA with the net rate you will receive on a standard savings account.
If you are a non-taxpayer then you should opt for the highest paying savings account, regardless of whether it is an ISA, as you are entitled to receive your interest tax free anyway.
Regular savings accounts are designed for people who want to put a regular amount in each month.
Often banks and building societies will only offer high-rate regular savings accounts to customers who have a current account with them, as an incentive to build loyalty.
These accounts can pay very high rates, but they often have conditions attached which, if broken, will lead to a loss of interest.
Some regular savings accounts also offer an annual bonus on top of their interest rate. Again, if you fail to make the required deposits you will lose the bonus.
Some simply pay an impressive basic savings rates – but limit the amount you can put in each month.
Most of these accounts limit the number of withdrawals you can make each year so they aren’t much good for emergency cash but they are an ideal way of getting into the savings habit and you can start one with as little as £5 a month.
For details of the Cumberland’s range of savings accounts, visit www.cumberland.co.uk or call into your local branch.
Phillip Ward is a marketing manager at the Cumberland Building Society.
This article should not be relied upon when making investment decisions. Always obtain financial advice.
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