It's always prudent to save for a rainy day, and many people with spare cash available prefer the security of placing it in a savings account to the more risky but potentially more profitable choice of other investments such as the stockmarket. Choosing a savings account would at first glance seem to be as simple as going for the one with the highest interest rate, but there are several other factors to take into account too.
The first choice to make is between opening an account with a high street bank, or going direct. High street banks give you the advantage of being able to manage your account with face to face contact with real people, and the ability to deposit cash and cheques easily. However, they have not historically offered the most competitive rates of interest, although this is changing slowly.
Direct savings accounts are operated solely online, by telephone, and by post with no possibility of visiting a bank branch to conduct business. This means they are cheaper to run for the banks, with less admin and staff costs, and so in turn they are willing to offer more attractive interest rates. Indeed, when internet direct savings accounts first appeared, some of them offered ten times the interest of a typical branch-based account, although the gap has narrowed considerably over the years.
The next choice to make is which type of savings account to go for. Amongst all the other options and features available, there are two basic kinds of account: regular savings, and deposit savings. With a regular saver account, you commit to depositing a fixed amount every month for a certain period, often a year. Most accounts will let you pay in more than this if you are able to, but if you fall below the minimum amount in a month you will likely forfeit interest payments for that month. With a deposit account there are no such restrictions - you can put in as much or as little as you want, whenever you want. On the whole, a regular saver account will offer better interest rates at the price of less flexibility.
Another factor that will affect the rate of interest you can earn is the level of access to your money you need. Basically, you can either choose a fully flexible acount which lets you deposit and withdraw funds whenever you want with no charges or penalty, or a more restricted access account which might require 30, 60, or 90 days notice before withdrawals can be made without incurring an interest penalty. Some accounts go further, locking your money in for a period of years, but these accounts are more like bonds than savings accounts, and are outside the scope of this article.
In general, you pay a price for flexibility, and so accounts with more access restrictions will pay a better rate, and so are perhaps more suited to long term investments than simply serving as a way of earning interest on spare cash that might still be needed at some point.
The other main aspect to consider is how the interest is paid. Most accounts will pay your interest in one instalment, once each year. Some, however, will credit your interest on a monthly basis, opening up the possibility of earning compound interest (i.e. where you earn interest on your previously earned interest). Nothing in the financial world is free though, so once again the flexibility of more frequent interest payments will be paid for with a lower rate.
As we have seen, there is more to choosing a savings account than simply comparing basic interest rates. Of course, you want to earn as much interest as possible, but locking yourself into an unsuitable account might not be the best use of your money.
What are savings interest rates? These are payments made by the bank to you for leaving your money in the bank. By depositing your money in the bank, your bank utilizes a portion of it in its loan operations where it subsequently earns through interest and loan charges. In effect, the income they receive trickles down to you, their source of money. This savings interest rate is actually an effective incentive system. Why so? If you save more money in your bank account through your deposits and savings, you end up receiving a higher return on the savings interest rate than other people would.
The last one is perhaps the most obvious feature of the bank that people do not take advantage of. A bank, being a financial intermediary, can actually help you save money efficiently. Here's how.
First, you are required to keep what is called a maintaining balance in your bank account. This means that even if you make deductions in your account, the bank requires you to save a bare minimum in order to continue enjoying their services. And yes, that translates to a forced saving on your part.
When it comes to financial management, even business professionals reach a consensus as to what is the most effective, reliable, and secure means to manage your money, and that is through the bank. Your bank is an effective means to manage your bills payments, keep track of your transactions, receive your income and whatever extraneous cash inflow, and help you save effectively.
Another feature of bank saving is the fact that you are free to continuously add to your account whenever you can. Otherwise, your money will remain safe in your bank. Moreover, while it's staying in the bank, you are actually earning interest rates on your money.
Banks have a threshold amount for you to be able to participate in the bank's long-term, higher yield savings schemes. Time-deposit accounts, mutual funds and the like require you to leave your money untouched for a longer period of time. In exchange for the bank's use of your money for a longer period of time, the percentages of interest return are double those that you would get in a regular savings account. You can add increments of a certain amount in order to increase the capital you invest in your time-deposit account or mutual fund. An increased account obviously translates to bigger interest gains.
Talk to your local bank about their savings schemes. They offer various mechanisms to encourage us consumers to entrust their money to them. In a bank, your money is in a safe place, and it is growing while it stays there.
Both Nicholas Hunt & Fred Peters are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Nicholas Hunt has sinced written about articles on various topics from Mortgage Insurance, Finances and Banking. Nicholas Hunt writes for 1Stop Finance UK, where you can read more on and. Nicholas Hunt's top article generates over 550000 views. to your Favourites.
Fred Peters has sinced written about articles on various topics from Interest, Banking and Credit Card Interest Rates. Find out more about how to save money at . You can also learn about saving money at the. Fred Peters's top article generates over 22200 views. to your Favourites.