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A savings account ought to be one of the most useful and easy to understand personal finance products that you can get. However, with every bank and building society competing hard for your money the choice of accounts can look bewildering. In the UK there are over 1,500 different types of savings account and each has its own properties.
This blog post will explain some of the basics so that once you decide what sort of account you want you're better prepared to hunt out the best ones.
Why are there different rates?
There's no mystery behind why banks and building societies offer savings accounts, they need your money so that they can lend that money in the form of loans, mortgages and credit cards. The difference between the lending interest rate and the savings interest rate is the bank's revenue.
As a rule of thumb the more you're prepared to lend to them, and the longer you're prepared to lend it to them, the more interest you'll earn. A bank also saves a bit on its operational costs too, because the longer it keeps you as a customer the less it has to spend on you - it costs a lot to market their products to you in the first place. Keep this point in mind and check what you're being offered against this idea.
A bank is likely to lure you in with an attractive headline rate or there might be a bonus for keeping your money with the bank, which will usually be paid after a year. Once the bank has paid you your bonus the rate of interest it pays you will fall away to a much lower level.
Remember, there's no such thing as a free lunch. Banks aren't really giving away money when they offer you a bonus. What the bank is counting on is that you either don't notice the interest you're getting has plummeted or you forget to move your money around. Basically if this happens the bank's given away a bit up front, only to set itself up with a chance to claw back what it's given away with a low interest rate in year two onwards.
Once you know exactly what bonus rate your getting and how long it lasts make sure that you diary ahead to the point that the bonus is paid and check what's on the market then. There's a good chance that your bank will have another good account a year from now.
Instant Access or Long Term Bond?
If you have some cash that you're pretty confident you won't need in the short term it makes sense to invest in an account that gives you more interest if you commit to having some restrictions on what happens if you want to take your money out.
If your savings account is your reserve fund to be tapped whenever you overspend, then you'll need to invest in an account that always allows you access to your money and doesn't penalise you too heavily for making withdrawals.
Obviously you'll also want to have an account that suits your lifestyle - if it's not convenient for you to go to a local bank to get money then you'll need an account that allows you to move money to a current account over the Internet.
Once you have chosen the bank account you want, be sure to add the account to your Money Dashboard. Our home finance software makes it simple to view, sort and search the balance and transaction list for any or all of your bank accounts and credit cards.