Your basket is currently empty!
How a Regular Savings Habit Will Grow Your Money
Why having a regular savings habit is important
Never underestimate how a regular savings habit will grow your money over time. Make saving one of your priorities by allocating a fixed amount of your income to savings each month. Ideally, set up a monthly automated deposit into your savings account, timed to leave your account just after payday. While saving may be the last thing on your mind due to the financial pressures of the current cost of living crisis, even a small, consistent contribution to a savings account will grow over time.
Emergency fund
You should aim to save and maintain at least three times your monthly expenses in an emergency fund. If possible, over time, try to build your emergency fund to cover six months of your expenses. This fund serves as your safety net, helping you cover any unexpected expenses without going into debt.
Shop around for the best interest rates
Shop around for the best interest rates on savings accounts to maximise the return on your money. Your piggy bank is for small change only, as, unlike a good savings account, it doesn’t pay interest. Take the time to learn about the magic of compounding interest and how it helps your money grow over time.
Savings accounts
Several types of savings accounts are available, such as instant access savings accounts, which, as the name suggests, allow you to access your savings at any time. If you have savings that you are unlikely to need for a while, consider a fixed-term saving account or a notice saving account, as these typically pay higher interest rates. However, they come with restrictions on accessing your money, as they lock up your savings for a specified period. Some savings providers offer loyalty regular saving accounts, where you save a fixed amount every month, usually for a year. These accounts encourage regular saving and, in return, offer above-market interest rates. Compare the interest rates offered across various accounts and financial institutions, as they can vary considerably.
ISAs – Individual savings accounts
Individual savings accounts (ISAs ) allow UK individuals to save up to £20,000 a year tax-free, in cash ISAs or stocks and shares ISAs. Individual savings accounts enable you to earn interest, dividend income and capital gains on investments tax-free. There are several types of ISAs available, including junior ISAs (JISAs) and Lifetime ISAs (LISAs). With a LISA, you can save for a house or retirement, with the government adding a bonus of 25% to any contributions you make, up to an annual contribution limit of £4,000. For more information about ISAs, follow the link:
Types of saving accounts
| Types of saving accounts |
|---|
| Instant access savings: Allows deposits and withdrawals at any time. |
| Fixed term deposit: Savings are deposited for a specified period and no withdrawals are permitted during this period. The cash and interest are returned to you at the end of the fixed period. |
| Notice savings account: These accounts require you to give notice to the savings provider when you wish to make a withdrawal. For example, with a 35-day notice account, you will need to give 35 days notice, before you can access the funds. |
| Loyalty regular savings: These accounts are usually only available to existing customers of a financial institution. They pay a higher interest rate than a typical savings account. Loyalty accounts usually have a fixed period of a year and require you to pay a fixed monthly amount up to a specified limit. You can access the money at the end of the fixed period. |
Personal savings allowance
As a basic rate taxpayer (earning up to £50,270), you have an annual personal savings allowance (PSA) of £1,000. This means you can earn £1,000 of interest a year tax-free. Any interest earned over £1,000 is taxable at 20%. If you are a higher-rate taxpayer, the allowance is £500 for the tax year.
The Financial Services Compensation Scheme guarantees savings deposits up to £85,000 with each savings provider.
Starting savings rate allowance
UK individuals who earn below the tax-free personal allowance of £12,570, can earn £5,000 in interest annually tax-free. This is the starting savings rate allowance. However, for every £1 you earn over the personal allowance of £12,570, you lose £1 of the £5,000 starting savings rate allowance. For example, if you earn £15,000, your starting rate savings allowance will be reduced to £2,570. This allowance is beneficial for retired people with a low income who earn reasonable interest on their savings.
Stock market
You should also consider investing in the stock market, whether through funds or by buying individual shares. Investing in the stock market does carry risks, as share prices can go up or down. Investing is a long-term savings alternative for money that you don’t and won’t need to access in a hurry. When you sell stock market shares and investments, you want to do this when the stock value is high. If you find yourself needing to withdraw part of your investments quickly, you might have to sell at a lower value.
Investing in the stock market should be done through a stocks and shares ISA (individual savings account), which lets you invest up to £20,000 a year tax-free. This means any dividend income and capital appreciation on your investments is tax-free, saving basic rate taxpayers 8.75% in dividend tax and 18% in capital gains tax.
Want to learn more about investing in the stock market?
What will the value of my money be in years to come?
Seeing how a regular savings habit grows your money over time provides a great incentive to save. By using time value of money formulas, we can estimate the future value of a monthly savings contribution. Using the link below, enter the interest rate, time period and monthly contribution to estimate the future value of your savings.
Use our future value calculator to see how a regular savings habit will grow your money with time and compounding interest
by
Tags: