As we know, current savings rates on offer by banks and building societies are at record lows.
The Bank of England’s official interest rate remains close to zero ever since the ‘08 financial crisis meaning savers have hardly had any rate rises passed onto them for over a decade.
So what should you do with your savings to make them work harder for you? Here are a few tips you can use to get more bang for your buck.
Your cash may currently be parked in an account you’ve been using for the last however-many-years, but there’s nothing stopping you from shopping around to find a savings account that offers a better rate of interest.
If you had £10,000 to spend on a car, you wouldn’t buy the first car you saw. You’d assess the options and purchase the one that’s best for you. A savings account should be no different.
One reason why your savings fail to grow is because inflation erodes the purchasing power of your money. In a low-interest rate environment, this can be a real problem, as it can erode all of the gains that your money makes from compound interest.
Inflation is the amount by which the price of everyday household items increases over time. In order for your money to retain its purchasing power, it needs to grow at over and above the rate of inflation each year. If it doesn’t, your savings lose their value.
So when looking for a savings account, compare the rate you’re being offered to inflation. If the savings rate is below inflation, keep on looking. Read more on this subject on our blog here.
It’s important to get a handle on how your capital and interest are affected by tax. Like inflation, tax erodes your gains if you aren’t careful with the way you manage it. The best way to avoid paying tax on interest is to use an ISA, as all interest earned within an ISA is tax-free.
In the current environment, where decent rates of interest on savings are hard to come by, making sure you’re earning tax-free interest and topping up your cash ISA as much as possible each year is essential. It’s how you ensure your savings are working as hard as possible for you.
Many savings accounts offer a higher rate of interest if you’re willing to lock your money away for a set amount of time. Whilst this might take a bit of planning – as you will have to work out at what point you need your money in the future – you should be rewarded with more interest.
Let’s say you have £20,000 in cash. It would be prudent to keep a small amount of that cash set aside for short term requirements (in instant access, low interest, savings accounts). This then allows you to lock the remaining, larger portion away in a savings account with a higher interest rate for 12, 24 or 36 months. The longer you lock it up, the higher the rate of interest.
This approach needs a little planning but it will pay you back with interest. Literally.
It may sound obvious – and it’s not always possible – but the easiest way to earn more interest on your savings… is to save more money. That’s because the more money you allocate to your savings, the more money is being subjected to the magic of compound interest, which means that more growth is being derived in interest.
Of course, it’s not always possible to save more. Life is complicated and expensive. But when it is possible, be sure to maximise the amount you’re regularly allocating to your savings account, so that the interest compounds and grows ever greater over time.
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