Last Updated on May 12, 2026
Why having a regular savings habit is important
A regular savings habit is one of the core foundations of personal finance. Having savings helps provide a buffer against unexpected expenses, while letting you plan and save for the things you want. Make saving a priority in your budget by allocating a fixed amount of your income to savings each month. Having a monthly automated transfer into your savings account, timed for just after payday, builds a strong savings habit. 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 grows over time, providing a financial safety net.
Building your emergency fund
An emergency fund should be your first savings objective to protect yourself against unexpected expenses. Aim to build a pot that covers three to six months of essential outgoings, such as rent or mortgage, food, utility bills and transport costs. Keep the savings in an easy-access savings fund, which allows access to the money at short notice.
Without an emergency fund, any unexpected costs, such as car repairs, a new washing machine, or a period out of work, can quickly lead to debt. Having an emergency fund means you don’t need to rely on debt or credit cards, and you can keep your finances on track. Once your emergency fund is established, you can focus on other savings goals.
Saving for specific goals
When saving for a specific goal, it’s important to set an achievable monthly amount and time frame, so that you stay motivated and on track. If, for example, you want to save £1,500 for a holiday in 12 months, you need to set aside £125 a month. Breaking big goals down into manageable monthly amounts makes them feel achievable and gives your savings a clear purpose.
How to save for regular expenses
Another important savings strategy is to allocate money to savings pots to cover regular expenses, such as quarterly utility bills, gifts, insurance renewals, and Christmas. Divide the actual expenses by 12 and set this amount aside each month. This avoids any of these expenses catching you off guard. Online banks and savings apps, such as Monzo and Starling, let you create individual savings pots for specific purposes. You can set up monthly transfers to each pot, so that when the expense comes around, you’ve already got it covered. All very simple and great for reducing financial stress.
Shop around for the best interest rates
Shop around for the best interest rates on savings accounts to maximise the return on your money, as rates can vary significantly. Take some time to learn about the magic of compound interest and how it helps your money grow over time. Even a small difference in interest rates can have a big impact on your savings over the long term.
Types of savings accounts
There are several types of savings accounts 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 you are unlikely to need for a while, consider a fixed-term savings account or a notice savings account, as these typically pay higher interest rates. They do, however, restrict access to your money and lock your savings away for a fixed period. Some savings providers offer loyalty regular savings 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.
| Savings Accounts |
|---|
| Instant access savings: Allows deposits and withdrawals at any time. |
| Fixed-term deposit: Money is deposited for a specified period, and no withdrawals are permitted during the fixed 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 want to withdraw money. 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 often have a one-year fixed period, and you must contribute a fixed monthly amount up to a specified limit. You can access the money at the end of the fixed period. |
Always compare interest rates across various savings accounts and financial institutions, as they can vary considerably. Websites such as MoneySavingExpert and Moneyfacts are useful for comparing the latest rates.
ISAs – Individual savings accounts
Individual savings accounts (ISAs ) let UK individuals save or invest up to £20,000 a year tax-free. With an ISA, you can earn interest, dividend income and capital gains on investments without paying tax. There are several types of ISAs available, including cash ISAs, stocks and shares ISAs, junior ISAs (JISAs) and Lifetime ISAs (LISAs).
With a LISA, you can save for a house or retirement, with the government adding a 25% bonus to any contributions you make, up to an annual contribution limit of £4,000. For more information about ISAs, follow the link:
Changes to ISAs from April 2027
From April 2027, the annual limit on cash contributions to cash ISAs is decreasing from £20,000 to £12,000 for people under 65. This change is designed to encourage people to invest more of their money in the stock market. From April 2027, you can save up to £12,000 in a cash ISA, with the remaining £8,000 of your ISA allowance allocated to stock market investments. While savings accounts offer guaranteed returns, investing in the stock market has historically provided higher growth over the long term. Investing does come with greater risk and is for long-term saving.
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 up to £1,000 in interest each year tax-free. Any interest above £1,000 is taxable at 20% (22% from April 2027). If you are a higher-rate taxpayer, the personal savings allowance is £500.
The Financial Services Compensation Scheme (FSCS) protects savings deposits up to £120,000 per person per UK-authorised 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 under 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 allowance. For example, if you earn £15,000, your starting rate savings allowance reduces to £2,570. This is particularly beneficial for retired people on a low income who hold a reasonable amount of savings.
The opportunity cost of saving versus investing
Savings accounts offer security with guaranteed interest and balances up to £120,000. It is worth understanding, however, what you may be giving up by keeping large sums in cash over the long term. This is known as opportunity cost, which is the potential return you forgo by choosing one option over another.
Historically, stock markets have provided higher returns than savings accounts over the long term. The FTSE-100 has returned an average of 7% annually since 1985. Interest rates on savings accounts are often below the inflation rate, meaning savings lose value in real terms over time.
If you invest £200 a month in an FTSE tracker fund, after 10 years your money will grow to around £34,600, assuming an annual return of 7%. The same amount in a savings account paying 4.5% interest will yield around £30,200. Over 20 years, the figures are £104,000 and £77,600 respectively.
That said, investing is not without risk. Returns are not guaranteed, and the value of investments can fall as well as rise. Savings accounts are the right place for your emergency fund and any money you may need within the next few years. But for money you are confident you won’t need for five years or more, investing is worth serious consideration. Make sure you invest using a stocks and shares ISA to shelter any returns from tax.
Our article on compound interest explains the long-term impact of compounding returns in more detail. If you are new to investing, our article on investing covers the basics.
What will the value of my money be in the years to come?
Seeing how a regular savings habit grows your money over time provides a great incentive to save. We can estimate the future value of a monthly savings contribution using time value of money formulas. Use the link below to access our future value calculator.
