Friday Finance: The Best Savings accounts (may not be a savings accounts)

A 5YP to build up a Gentleman’s wardrobe is a worthwhile undertaking. This blog is dedicated to that precise endeavour.

A far more significant 5YP, however, is to build up your savings, which won’t be spent on your wardrobe but rather exist to safeguard and to enable the other more important parts of your life.

TheBestManHolidayHere are some generally accepted views about Savings:

  • Most people should save, but most don’t save enough and many don’t save at all.
  • A healthy minimum savings pot is sufficient to cover 3 months living expenses, should we find ourselves unexpectedly unemployed. An ideal would be 6-9 months. Most of us don’t have this.
  • Aiming to save about 10% of your gross income each year is a good rule of thumb for how much we should aim to save. Most of us don’t achieve this.
  • Most Britons have more unsecured debt (i.e. not linked to a mortgage) than we have savings. Indeed, according to thisismoney.co.uk Brits have the lowest savings to debt ratio in Europe.

British Saving Week LogoOne of the problems at the moment with saving in GB, however, is that interest rates are at an historic low. This is great news for mortgage holders but less great for savers.

In real terms low interest rates means that our savings are not keeping up with inflation. Put more simply, £1,000 saved this year will be worth slightly less a year from now because inflation.

If you assume a rate of inflation of, say 2.5%, it means that stuff that costs £1,000 today will cost £1,025 a year from now. Put the other way round, £1,000 saved this year will only to buy £975 worth of goods at next year’s prices. Extrapolate 5-10 years into the future or multiply the savings by a factor 10 and this becomes a much bigger problem.

Pund coinsThe best way to avoid inflation erosion of your hard earned savings is to get a decent return. If you were able to get a return of say 4% and inflation were 2.5% at least the value of your savings would not be eroded by inflation.

Your £1,000 would grow to £1,040 in a year. Even with inflation of 2.5% you would be ahead of the game. Just.

But if you can find a savings account in Britain, which offers you 4% interest, you are a better man than me. Even if you’re a woman….

Typically the best savings accounts to go for are ISAs (Individual Saving’s Accounts) because they offer tax-free interest. The government doesn’t cream off 20% of the interest you have received. Even better the allowance on ISAs has been raised so that you can save up to £15K per year without paying any tax on the interest. Really good stuff.

Until you consider the interest rates offered.

interestratesukThe market leading ISA savings rate today is 1.55%. And this includes a bonus rate of 1.05% in the first year. So 12 months from now it will offer an interest rate of 0.5% Pitiful.

The average ISA interest rate is somewhere around 1.25%! No wonder so few of us bother to save. However there is another way. Enter the TSB current account.

It offers a whopping 5% interest. It is not tax-free however but even after tax of 20% you receive 4% interest. That’s nearly 3 times the average ISA.

There are a number of catches however. First you need to credit this account with £500 each month in order to benefit from the rate. No probs, get your salary paid in or just move money through the account.

promotional-banner-current-accountsSecond and more disappointingly, this rate is only available for up to £2,000. Above that you receive no interest. Nada. So if you have savings over £2,000 they need to go somewhere else.

The only way to get round this if you wish to take advantage of the TSB offer is to have multiple accounts. One in your name, one in your wife’s name, one in joint names. This would get tricky though, not least with the need to fund each with £500 per month.

TSB are not alone. Nationwide offers 5% on balances up to £2,500 but asks for £1K credit per month. Lloyds offers 4% on balances between £4K & £5K but requires credit of £1500 per month and a minimum of 2 direct debits to be paid from the account.

The point is this. A savings 5YP is already hard work. Make sure you get a decent rate of interest while you do so. And the best rates may not be in savings account. They might just be in a current account. Go figure.

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