A commonly held debate is whether it is worth opening and using a savings account if you are in the UK. The controversy is that the current interest rates offered by banks are meagre and can be as low as 0.01%. This means it’s going to be very difficult to build wealth using these accounts.
You aren’t getting anything remotely worthwhile with interest rates this low, but even so, are there any situations that make it worth having a savings account in the UK?
It is worth having a savings account in the UK. While a 0.01% interest rate may seem so small that it doesn’t matter, saving in of itself is important. Consider what you’d do in an emergency if you need cash fast. Additionally, you can get higher interest rates if you know where to look.
While many people don’t feel the incentive to save due to the low-interest rate saving accounts on offer in the UK, there are multiple reasons why you should start saving money every week.
Why Saving Is Important
It’s much easier to spend money than it is to save it. The chances are that you have many things you’d like to do with your money right now. Thus, many people have difficulty finding the motivation to open a savings account and pour money into it frequently. After all, that’s money you can’t use (yet).
The truth is that it is much easier to save than most people think. This example may not apply to everyone but ask yourself how much you spend on coffee or tea when out. It’s common for people to spend £6 on a coffee every day before heading to work or school.
Now, imagine cutting that down to 3 times a week instead and making your beverage at home much cheaper with Amazon Brand Happy Belly Coffee 2 days per week. You saved £12 that week, which translates to £48 a month.
Now consider what other frequent small purchases you make that you could live without. Instead of impulse purchasing, tell yourself that you’ll give yourself X money for not buying it and put it into savings instead.
It’s recommended for adults to have at least £1,000 saved for an emergency. If you start right now, you’ll reach this faster than you may think! If you can swing it, try to budget 20 percent of your total monthly income towards a savings account.
A common point made is that interest rates at a lot of banks and building societies are too low. After all, interest is an excellent motivator for long-term saving. But is there any way to have a savings account with a decent interest rate in the UK?
How to Get a Decent Interest Rate for a Savings Account in the UK
You commonly see low-interest rates for savings accounts because they are very accessible to get started with. They require shallow deposits that most people can afford and they limit how much you can deposit per month – usually up to £300. Since you can use your money at any time, the bank has a more challenging time granting you a larger interest rate.
The higher interest rates are with the savings accounts where banks lock in your money for a certain period. You can’t withdraw this money.
For example, Paragon has a fixed rate savings account that requires a £1,000 deposit with a 0.75% interest rate set for two years. It’s one of the better savings accounts in the UK, and so if you can afford to deposit this much money, we would recommend giving them a look. As we said above, the catch is that you can’t withdraw this money for that period, which will be a problem when trying to set aside emergency funds.
It’s more for people who want to dump a large sum of money in a savings account and watch their cash grow over time. We would suggest making a much bigger deposit than £1000 where possible because you are only earning £15.12 after two years.
Investing in the long term without easy access to your cash may favour investing in the stock market (covered in detail in this post on investing with Vanguard but more on that later)
If you’d like a savings account where you can access your funds, an easy access account is what you are looking for. The interest rates are so low that they don’t matter at the point aside from keeping up with inflation, but as we stated above, good saving habits are what will “earn” you real money.
Which easy access account would we recommend? Right now, Coventry Building Society offers 0.30% interest, which is better than a lot of banks. Even better is Aldermore, which offers a 0.50% interest rate. The initial difference between these 2 is that Coventry Building Society requires a minimum deposit of £1 while Aldermore requires a minimum of £1000.
The difference between these two isn’t going to be large at the end of the day, but if you were planning on depositing 1,000 pounds anyway, you might as well go with the latter.
Saving for a Home? That’s Where the Real Benefits Are
The UK’s interest rate situation gets much better when you are trying to save for a home. When you open help to buy ISA, you can make some serious savings. For every £200 saved, you can earn £50, or 25%. Two hundred pounds is the maximum you can save each month from getting these benefits, so it is ideal for saving this amount every month if you can.
Once you are ready to buy, you will see this government money. If you intend to save for a home, this is the best route to take.
It may also be worth considering the Lifetime ISA which I wrote about in detail here – this ISA allows you to save in cash or via the stock market.
Consider a P2P Savings Account
If you want to earn high interest, opening a P2P savings account will be your best bet as of now. How does this work?
In short, you are essentially lending your money to businesses and individuals that need to borrow money. You get much higher interest rates than what banks will offer you right now in exchange for this. It can be as high as 5% – 6% to put into perspective how much interest you can earn. £1000 that is untouched will turn into £1050 on 5% interest after a year, which is better than the previous numbers we have been talking about up until now.
By default, P2P lending is riskier but seasoned investors will recognise that higher risk typically results in a higher reward.
What’s the catch to a P2P savings account? You are not protected by the FSCS (Financial Services Compensation Scheme), which means that your savings account doesn’t have the protection to prevent your entire savings from being lost.
This is the worst-case scenario, and chances are, if you go with a reputable P2P lender, you are probably going to be okay. It is almost guaranteed because each lender has its form of protection should an unfortunate scenario unfold. But it’s worth considering these risks.
P2P does take some research to learn how to do it properly; check out the below video below if you’d like to learn more about it:
https://www.youtube.com/watch?v=uCVYGPbpKnA
Would you be better off saving money using a stocks and shares ISA?
Generally speaking, investing your money in stocks & shares via an ISA will provide a better return over time. Investing in a fund such as a global index fund tracker will likely return you between 5-10% a year on average with fluctuations along the way based on past performance.
The caveat to this is 2-fold; unlike a cash savings account, you can lose money in the stock market. E.g., you could invest £100 today and a month later, your investment could only be worth £85.
Therefore, if you’re naturally risk-averse and don’t deal well with the thought of losing money, a cash savings account may be a better option for you.
The second advantage of cash savings accounts over investing in the stock market is accessibility. Whilst most ISAs will allow you to sell your investments quickly if your investments are at a low, this may be impractical and make selling difficult.
It should be made clear – investing in the stock market is a far more powerful wealth-building tool than a cash savings account. However, a cash savings account can be useful, particularly if you are saving for something like a house deposit where you know you will need the money at a particular point in time.
Conclusion
While opening a savings account in the UK won’t net you huge returns, saving is still an important financial aspect that everyone should practice. Every bit counts, and there is a good chance that you spend money on little things that could go into savings.
If you are saving money for emergencies, opening an easy access account is what you are looking for. However, if you want to lock away money and not touch it, a fixed rate savings account makes sense, but large deposits are needed to make it worth it.
Building long-term wealth is difficult to do using only cash savings accounts (not least because of the erosive impacts of inflation). For this, the best solution is investing in the stock market via a stocks & shares ISA.
As always, please remember I am an Accountant, but not your Accountant. In this post (and all of my others) I share information and oftentimes give anecdotes about what has worked well for me. However, I do not know your personal financial situation and so do not offer individual financial advice. If you are unsure of a particular financial subject, please hire a qualified financial advisor to guide you.
This article has been written by Luke Girling, ACA – a qualified Accountant and personal finance enthusiast in the UK. Please visit my ‘About‘ page for more information. To verify my ACA credentials – please search for my name at the ICAEW member finder. To get in touch with questions or ideas for future posts, please comment below or contact me here.