Savings. Clearly Explained.

Looking to save for a rainy day? Savings are essential for financial security and allowing you to live life more. Here’s what you need to know.

Is saving really important?

Unfortunately life doesn’t always go as planned. And an emergency fund can be a genuine life saver. So yes – saving is important! And having that security is one less thing to worry about.

How much should I have in savings?

As a rule of thumb, you should have at least 6 months worth of your expenses in your savings pot. That’s your mortgage, household bills, council tax, food, everything and anything you would normally pay for each month multiplied by six.

Once you save enough for 6 months worth of expenses, you can plan to save for 12 months and beyond, but start small, and work to achievable goals.

How to start saving

Saving isn’t putting all of your salary into a savings account straight away each month, it’s not even about putting a small bit of your salary in, it’s about building up your savings pot consistently over time. It’s hard to do, but consistency really is key.

You don’t have a choice paying tax or national insurance, try and see putting some money aside for savings as the same thing. The amount really is up to you, but go for as much as is affordable, perhaps 5% of your take home pay per month to start with and work up to 10% over time.

Types of savings accounts

Easy access account

An account that lets you withdraw your savings at any time, or with very little notice. Because of this flexibility, the interest rate is typically low.

Cash ISA (Individual Savings Account)

Everyone in the UK is encouraged to save by the government with a tax-free allowance, which in 2020/21 is £20,000. This means cash inside these accounts won’t incur any tax on the interest at all. You also have the flexibility to withdraw cash at short notice.

Fixed term ISA (Individual Savings Account)

These accounts are similar to a Cash ISA – you get a tax-free allowance where you don’t pay tax on the interest, but with these accounts you agree to a fixed interest rate for a certain period of time and cannot withdraw your money. These are typically higher interest rates.

Notice accounts

A savings account with normally higher interest rates, but you must plan and notify the bank of withdrawals in advance.

Fixed rate bonds

These are accounts where the money is almost completely locked away for a set period of time and with a fixed interest rate that’s guaranteed. More typical for large lump sums.

Regular savings account

With a regular savings account you agree to pay in a certain amount each month, and will normally get a higher interest rate.

Junior ISA (Individual Savings Account)

These are a great way to save for your children – it’s a tax-free allowance to set them up for the future. The current allowance is £9,000 per year.

Which savings account is right for you?

There’s a fair bit of choice for savings accounts, and they are all suited to different needs. The good thing is you can get help making the right choice.

We’ve found the savings decision tree from MoneySuperMarket to be super helpful. It’s easy to use, give it a go here: find the right savings account for you.

There’s no need to stash money under the bed

In the UK, your savings are protected up to £85,000 should your bank not be able to pay you back, typically because they’ve gone bust (which very rarely happens). It’s called the FSCS – Financial Services Compensation Scheme, and is funded by the financial services industry and set up by parliament to guarantee your savings. 

The scheme actually protects you from all financial services firms, not just banks, and protects mortgages, insurance and investments too.