The New Year’s resolution you really should keep!
Make 2010 the year you get into the savings habit! Serena Cowdy outlines the options to suit you.
The season for New Year's resolutions is upon us once again, with millions of Britons determined to get fitter, healthier and wealthier.
If your resolution is money-related, you could get a helping hand from the Office of Fair Trading (OFT) and the Citizens Advice Bureau.
As part of the OFT's Save Xmas campaign, Citizens Advice Bureaux and other organisations will be running a series of financial workshop sessions in the New Year, to raise awareness of savings options and encourage people to start saving.
The workshops will be targeted at priority groups (including housing association tenants, lone parents, and those on benefits or low incomes) and you can find out more about them here.
For someone starting a savings pot for the first time, the huge range of accounts on offer can seem confusing and rather daunting. However, once you're clear on the basics, everything else really will begin to fall into place.
Here, I'm going to look at the main types of savings account suitable for someone starting from scratch. I'm also going to explain which one might be right for you.
Your first step
First of all, make sure you take advantage of your tax free ISA (Individual Savings Account) allowance.
Basic rate tax payers usually lose 20% of the interest they earn on savings, while higher rate tax payers have to hand over a whopping 40%. By stashing your cash in an ISA, you will receive 100% of the interest you make on your investment - helping your savings pot to fill up faster.
Right now, if you're over 16 you can save up to £3,600 in a cash ISA, and this limit will increase to £5,100 at the start of the new tax year in April 2010. (If you're aged 50, or will turn 50 before April 5 2010 you can take advantage of the increased limit now).
Easy access
Easy access accounts (also known as instant access accounts) allow you to deposit and withdraw cash at any time, usually with no restrictions or financial penalties for doing so.
The downside to this flexibility is that the interest rates on offer with these accounts are usually relatively poor.
Best suited to…
An easy access account is a good savings option if you think you might need to access your funds quickly, for example to deal with a financial emergency.
This sort of account is also a sensible option for people who are unable to commit to saving a set amount of money each month as they allow you to squirrel away as much or as little as you like, when you like.
What to watch out for
Easy access accounts almost always come with a variable rate of interest. This means that theoretically, the rate you're earning on your cash could drop at any time.
Some easy access accounts include a temporary bonus rate. To avoid complete rate uncertainty, it may be worth opting for an account which fixes the level of this bonus element.
Regular savings
Regular savings accounts require you to put a set amount of money into them each and every month. In return, they tend to offer better rates of interest than their easy access counterparts - and these rates are usually fixed.
Each regular savings account will have strict limits on the minimum and maximum amount you're allowed to deposit on a monthly basis.
This sort of account tends to operate for one year only. After this time it will close, your cash will be swept into a low-interest account and it will be time to find the next best deal.
Best suited to…
A regular savings account is an excellent option if you're confident you're able to commit to saving a certain amount every month.
You can set up a monthly direct debit from your current account, sit back and benefit from a decent rate of interest.
What to watch out for
If you think you might need to get your hands on your savings in the next 12 months, a regular savings account probably isn't for you. Many don't allow any withdrawals during the term of the account, or will penalise you heavily by cutting the rate of interest you receive. Similarly if you miss a payment you are again likely to see your interest rate drop dramatically.
The exception to the savings rule
Finally, my exception to the savings rule: If you're in debt, it usually makes financial sense to pay off all your debts before you start to save.
This is because the interest rates you're being charged on your debts will usually be higher than the interest rate you're being paid by any savings account.
Even low-rate debts (like the balance on a 0% credit card) will usually start to incur high levels of interest if not cleared within a certain period of time.
So, get back into the black; and then start saving immediately. Good luck!
**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.**
