It sounds like a new age meditation, but the Savings Fountain is my concept to cut a path through the savings conundrum. Using it could easily double the interest you earn.
It's necessary because normal savings accounts aren't the first place to start with your cash. There's an order of priority to maximise your interest because different savings products work in different ways, with different rates and tax treatment.
In this guide
Originally transmitted in July 2008
1. Do you have any debts?
If you do, it's far better to pay off debts before starting to save. The interest cost of debts is much higher than the interest earned on savings. So pay off your debts with your savings and you're much better off.
In some circumstances, this can apply to your mortgage as well as credit card and loan debts. If this is your case, please read the full Repay Debts or Save? guide first.
2. Do you want to save or invest?
It's important to understand the difference between saving and investing as a start point.
- Saving. You put money away in complete safety, and get it all back plus interest.
- Investing. You risk losing some interest and/or some cash for the chance it'll grow quicker.
There is no right answer here - it all depends on your circumstances. Over the long term, the stock market usually outperforms savings accounts. Unfortunately by its very nature this isn't guaranteed. Get it wrong, or even just get the timing wrong, and you could end up with less than you started with.
Of course, it's not just the stock market. Property, wines, antiques, and starting a business can all be seen as types of investment. They all involve you putting money away in the hope your assets will appreciate, but with the risk you may lose cash.
If you can't afford or don't want to take any risk with your cash, then saving is for you and thus read on. If you want to invest, see the relevant articles in the Saving and Investing section.
The savings fountain
The fountain is simple. Pour as much cash as possible into the best-paying savings vehicle possible. Then, when it's full and overflowing, fill up the next best, and so on.
All taxpayers should pour money into a cash ISA first. These are just like a normal savings account, but tax-free.
Each tax year, every UK adult gets a new ISA allowance for cash, shares or life assurance investments. Up to £5,760 a year is allowed in cash savings. If you don't use, it you lose it.
Many cash ISAs are instant access - money may be withdrawn at any time without losing tax benefits. But once withdrawn, it can't then be redeposited in the ISA. Remember, the cash ISA limit is £5,760 each for you, your partner and any child over 16.
The ISA year ends every 5 April, so you must get the cash in by then. However, this means you could deposit £5,760 on 5 April, and then your new ISA allowance on 6 April to max it out.
Once the cash ISA overflows, use special regular saver accounts as they consistently outpay
standard savings accounts, without locking your money away as harshly as with fixed rate savings accounts.
As the name suggests, they require a monthly payment into the account.
The drawback with regular savers is you can't just dunk cash straight in there - instead, just drip-feed it with a standing order from a normal savings account.
Once the money splashes over the edge of a regular saver, or for instant access flexibility, it's onto the best paying standard account. Instant access gives you easy flexibility. The difference between a savings account and a normal day-to-day banking current account is that there are no cheque books, and with a few exceptions, no cash cards. These are a place to dunk your money in and earn serious interest.
These usually allow unlimited (or at least huge amounts of) money to be put in, but for safety reasons most should limit this to around £85k in each one. Read our Savings Safety guide.
Both regular savers and instant access savings accounts require taxpayers to pay tax (clever that, eh?). The rates are:
- If you earn under your personal allowance (£9,440 for under 65s), you won’t have to pay tax.
- If you earn (from working and savings interest) less than your personal tax allowance, plus £2,790, you will pay 10% tax on some or all of your interest
- If you earn over your personal allowance, plus £2,790, you pay 20% tax on the interest on savings
- If you pay the higher tax rate you pay 40% tax on the interest on savings.
How safe are your savings?
Bank collapse was once easy to dismiss, then the credit crunch and global market turmoil hit. The UK soon found itself bailing out Northern Rock, and the US authorities followed for even bigger bank Bear Stearns. These days every sensible saver should ask “is my money safe?".
The answer is simple. Provided your money is in a UK-regulated bank or building society account, it’s protected under the Financial Services Compensation Scheme (FSCS). Here’s the golden rule:
The first £85,000 per person, per financial institution is guaranteed.
Sadly, this is the simple face of savings safety. The exact rules are more complex, involving how different banks are registered and what counts as a financial institution. For full info, read the full Are My Savings Safe? guide.
How to maximise safety
If you've got less than £85,000, there's no problem. Those with bigger savings, in the unlikely event a bank or building society went bust, for total peace of mind shouldn't put more than £85,000 in any one institution. Spread it around instead.
For those with very large amounts of savings (for example a house sale), this could lead to lots of accounts. Even if you've too much to stick to the £85,000 limit for each one, the general rule of not having all your eggs in one basket still works. For more info, see the how to get 100% safety section of the Savings Safety guide.
This guide and best buys
It's impossible to pick "which bank is in trouble?". We've seen great names of world banking like Goldman Sachs and Merrill Lynch in trouble. The only solution for this site is that we'll report the top rates regardless, alongside explaining any 'protection oddities'. So far, world governments have reacted to protect their banks and no savers have lost money, and its likely (though not certain) that will continue.
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A few variations
There are some other fountain options. Those willing to lock money away can opt for fixed rate savings accounts or cash ISAs. Also, remember as children don't pay tax, their accounts are an efficient place to put money in (see the Children's Savings guide).
Note for non-taxpayers
The non-taxpayers' fountain differs slightly, as there's no cash ISA tax gain. Potential future taxpayers should still consider them as, if you open one now and don't withdraw the money, the interest should still be tax-free by the time you start paying tax. It's a good preventative measure.
For those who won't ever pay tax, the fountain should start with a regular saver as the interest is highest. After that, pick a cash ISA or savings account depending on which pays more.
Remember the rates on all these accounts will change. It's worth checking every six months or so to see if there's a higher-paying equivalent.
Married couples can save tax on savings
If you're married and one of you pays tax at a higher rate than the other, then make sure all the savings (providing you trust each other) are in the name of the lower rate taxpayer. This way you'll pay much less tax on the interest, saving you money. Very simple and very effective. Discuss it in the forum.