Where is the best place for my savings?
Loans 2 Go helps you to save money…
2020 has been a really difficult year for many of us financially. Lots of people are struggling. 2020 certainly has not turned out the way we planned.
But if you are fortunate enough to be in the position where you either already have some savings or are now able to start saving money, the next question is what do you actually do with that money? Interest rates are continuing to fall, and this affects most types of savings accounts. The economy is very shaky and the future uncertain. So what is the best thing to do if you want to save money?
In this article we will look at various places that you can put savings if you do have them, with any advantages and disadvantages to look out for.
And if you are just setting out on your savings journey, and would also like advice about things that you can do every day to save money then take a look at our article Want to save money but don’t know how?
One thing to bear in mind from the outset is that whilst you want to make your money work for you, and gain interest where possible, if the interest takes you over your personal tax allowance you will need to pay tax on the interest. So, depending on how much money you have to save, you need to be aware of the tax implications of saving money too.
Let’s take a look at various possible options for your savings:
Paying off debt
This may seem a strange place to start, but it is usually a good idea to use any extra money to pay off debt as well as saving. The interest rate you are charged on debt such as credit card balances is much higher than the rate that your savings would earn in most types of savings accounts.
So if you are spending a lot of money each month paying off credit cards, it could be better to get those paid off so that you are not throwing money away on the interest charges. This will release more money each month, which you can then start saving instead of having to keep making credit card repayments.
Bank current accounts
If you have a fairly small amount of money to save, one option is just to leave it in your current account – although you would then have to be very disciplined about not using it. But many banks now offer current accounts that pay good rates of interest or bonuses.
For example Virgin Money pays 2.02% interest on balances up to £1,000, Nationwide 2% interest on £1,500 for the first year, and several banks have Rewards current accounts that give you a monthly bonus (usually around £4-£7) if you remain in credit. Other banks have current accounts with money saving benefits such as cashback, reductions on bills, cinema vouchers and magazine/movie subscriptions.
So it is definitely worth looking into these as a viable option for saving money. Just be aware that some bank accounts have minimum monthly pay in requirements, or for you to set up a certain number of direct debits.
Bank and building society savings accounts
There are a wide range of savings accounts available from different banks and building societies. Which one is right for you depends on your circumstances and how long you want to save your money for.
If you are happy to put money away for a long time then take a look at notice accounts. These savings accounts are likely to pay a better rate of interest but you would need to give a certain period of notice (eg 3 months) if you want to get hold of your money. For long term savings also take a look at savings bonds in the next section of this article.
Most banks and building societies also offer easy access accounts, which enable you to put in and withdraw money any time, without notice. Then there are regular savings accounts where you agree to save a certain amount each month then access the money – plus interest – after a particular time, usually twelve months.
So before you choose a savings account, think about what is best for you and then look for an account in that category with the highest rate of interest. However, be aware that interest rates for savers are currently pretty low – typically around 0.1%.
Savings and income bonds
As well as savings accounts, many banks and building societies also offer savings bonds. These are a way of locking away a sum of money at a fixed rate of interest for a set term, usually at least a year. Think of it as you lending money to the lender and they pay you back with interest. Savings bonds can be a good way of saving a lump sum that you are confident you won’t need to access any time soon.
Another type of bond is an income bond. These are available from National Savings and Investments (NS&I). As the name implies, they provide a monthly income on your savings. This is done by interest being paid each month instead of being accumulated at a future date. They are ideal if you want to keep your savings safe and also use the interest to help you on a month by month basis. They pay a good rate of interest (currently 1.15%) and you can pay in or take out money at any time.
Another type of bond offered by NS&I is the premium bond. These do not pay a fixed rate of interest, but every month your bond numbers are entered into a prize draw, with the winning numbers selected by the computer Ernie (Electronic Random Number Indicator Equipment). There are tax-free prizes of between £25 and £1million. NS&I calculate the average prize rate to be 1.4%.
Premium bonds need to be bought in multiples of £25, and can currently be applied for either online or by phone. They can be cashed in at any time.
ISA and LISA
Another form of saving is an ISA (Individual Savings Account). You can apply for an ISA from any financial provider online.
An ISA enables you to save up to £20000 a year and pay no tax on the interest.
There are three main types of ISA:
- Cash ISA: similar to a savings account, except you won’t have to pay tax on the interest. The best current interest rates on cash ISAs are between 0.5% and 0.9%.
- Stocks and shares ISA: in this kind of ISA, your money is invested in stocks and shares. If the economy is doing well, the return from it can easily outperform a cash ISA. But be aware that stocks and shares can also go down, so there will be times when the value dips. But for a long term investment, this type of ISA could be a nice little earner.
- LISA: If you are aged between 18 and 40 you can also benefit from a government boost to your savings by taking out a Lifetime ISA (LISA). This enables you to save up to £4,000 each year and the government will add a 25% bonus to your savings every year until you reach the age of 50. However, you can only withdraw your money for specific circumstances (eg buying a home) without being charged a penalty.
We saw above that some ISAs are based on the stock market. You can also buy shares directly from companies; you do not have to go through an ISA. The easiest way to do this is to set up a nominee account with an online share dealing platform. You will then be able to buy and sell shares from any company listed on the UK stock exchange as well as various overseas exchanges.
As with the stocks and shares ISA, you need to be aware that the value of stocks and shares can fall as well as rise, so it is best viewed as a longer term investment.
Peer-to-peer lending (P2P)
Peer-to-peer lending is where you invest money in other peoples’ businesses. Lenders and businesses are matched online by P2P brokers such as Funding Circle, Ratesetter and Zopa.
When things go well, you can achieve an excellent rate of return. But P2P can be very risky, particularly in the current economic climate. Depending how the business goes in which you have invested, there is the possibility of your money losing value, or even disappearing altogether if the business folds. P2P lending is not currently covered by the FCA compensation scheme.
So it is wise to consider P2P only if you have a sum of money that you can do without and would be prepared to lose if things went badly wrong. If you are in this position, then you could make good money if you choose your investment business wisely and the business does well.
We saw earlier that it is good to clear existing debts as well as saving money. So if you have some money to save, one thing you might want to consider doing is paying extra into your mortgage. Even if you can’t clear it completely, paying extra can be beneficial.
By making extra payments into your mortgage you reduce its overall size and also the amount of interest you’ll pay overall. Both these factors mean that you will be able to pay off your mortgage much quicker, perhaps even by years. And while the mortgage is still running, you will also have a greater proportion of equity in your home which can help you if you decide to move home later.
If for any reason you have a lot of money to invest, another option would be to use it all to buy a property. This could either be as a new home, a second home, or a buy-to-let. With a buy-to-let property you would gain regular rental income as well as the gradual increase in the value of the property itself.
Investing in property is particularly worth considering with the current low levels of stamp duty – see our article So what exactly is stamp duty? As a general rule, whatever happens to the economy, property is always a pretty safe investment option.
So, whether you are looking for the best place for existing savings, or plan to save money and want to get off to a flying start, we hope that the above information is helpful.
Check back here soon for more financial and lifestyle tips from Loans 2 Go!