A great place to start saving
For many months now, the rates paid on the majority of savings accounts have looked… Well. Pretty rubbish.
According to data from Moneyfacts, 72% of savings providers cut the interest they paid to customers when the base rate was slashed to its all-time low of 0.5% in March. This left a whopping 84% of savings accounts offering pitiful rates of 0.5% or less!
The great news is that, in recent weeks, competition has started to hot up in the savings market. For example, the market leading Alliance & Leicester Online Saver Issue 5 now offers customers a rate of 3.15% AER on balances from just £1.
So, if you've yet to jump on the savings bandwagon, now is the perfect time to start building up that rainy day fund.
Why you need a nest egg
According to a recent report by the insurer Scottish Widows, 30 million Britons do not have an insurance policy or savings that would protect them in the event they suddenly lost their income.
I think that's really worrying at a time when redundancies are on the rise and the economic outlook is so uncertain.
Of course, it's tough to set money aside when your budget already feels stretched - but money saving tips like these may help you a find few extra pounds each month that could be stashed in a savings account.
No matter how small a sum you can afford to put by every few weeks, once you start saving regularly you'll love the satisfying feeling of building up a cash cushion to fall back on in emergencies.
Where to stash your cash
In my opinion, savers who are just starting out should stick with easy access savings accounts (or instant access accounts).
While a fixed rate bond might offer you a higher rate of return on your money, it's very unlikely you will be able to remove cash from your account until the bond matures. This might take between one and five years, depending on the bond you choose.
For this reason, I've chosen to look at the market's leading easy access accounts, comparing them in the table below.
Also, as this is an article for people just starting to save, I've only included accounts that allow customers to make small opening deposits of £1 (rather than those demanding initial deposits of £1000+).
| Account | Interest rate (AER, variable) | Minimum/maximum deposit | Notes |
| Alliance & Leicester Online Saver Issue 5 | 3.15% | £1 / £2m | Includes a variable bonus of 2.65% on balances from £1 - £24,999, payable until 2 August 2010. Bonus on balances above this level is tiered. |
| Birmingham Midshires Telephone Extra Account | 3.15% | £1 / £1m | Includes a fixed bonus of 2.65% for 12 months. Account can only be operated by telephone. |
| Citibank Flexible Saver Account Issue 5 | 3.1% | £1 / £1m | Includes a fixed bonus of 2.06% for 12 months. |
| ING Direct Savings Account | 3% fixed for 12 months | £1 / £1m | Rate reverts to 0.5% after 12 months. |
As you can see, the savings accounts from Alliance & Leicester and Birmingham Midshires top my table. Both pay customers an impressive 3.15% on balances from £1.
Both accounts also come with a bonus. Alliance & Leicester's is tiered in accordance with how much cash you hold in the account, but all savers with this deal will earn the same rate of interest overall.
No matter what its size, the bonus on offer from Alliance & Leicester is variable. This means that the rate you earn on savings held in this account could decrease over time.
Conversely, the bonus of 2.65% on offer from Birmingham Midshires is fixed for 12 months. However, this account can only be operated by telephone, which may put you off if you prefer to manage your money online.
The accounts on offer from Citibank and ING Direct might also tempt you if you're in the market for a little more certainty about your savings rate.
Citibank's Flexible Saver Account Issue 5 comes with a fixed bonus of 2.06% for 12 months, while new savers with ING Direct will earn a guaranteed 3% AER for 12 months from the date they open their accounts.
Smart rules for new savers
Finally, here are a few rules I think all new savers should get to grips with before they start stashing their cash.
1. Save little and often.
It doesn't matter if you can only put by a small amount each month; getting into the savings habit will set you up for a brighter financial future.
2. Save no more than £50,000 with any financial institution.
This is the maximum sum guaranteed by the Financial Services Compensation Scheme (FSCS) per individual, per financial institution. However, it isn't always easy to work out which banks count as a single institution, so make sure you do your homework; this article is a great place to start learning more.
3. Make sure you know how your money is protected.
If you save with a bank that isn't UK-owned, your money may not be protected under the FSCS. For example, savers with ING Direct have their deposits guaranteed by the Dutch compensation scheme, which guarantees up to €100,000 of savers' cash. It is up to each individual to decide where they think their money is safest.
4. Keep your eye on your interest rate.
Often - as is the case with the accounts featured in this article - the market's top savings deals come with temporary promotional bonuses. Therefore, to make sure you always earn a competitive rate on your savings, shop around for a new account at least once a year.
**This material is for information purposes only and should not be considered financial advice. We strongly encourage our readers not to rely solely on this content, but to seek independent advice when making financial decisions.**
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