How to start saving
Get max interest from every penny
Want to start saving but don't know where to put your money? Coronavirus might have unleashed an unwelcome domino effect for savers, but our Savings Fountain shows you where to stash your cash to grab the best possible interest rates and incentives, plus we run you through other quick-win savings tips.
Two questions before you start saving
1. Do you have any debts?
If you do, it's generally better to pay off debts before starting to save. The interest you pay on debts is normally much higher than the interest earned on savings, something that has become more pronounced since the onset of coronavirus. So pay off your debts with your savings and you're better off.
However, there can be exceptions to this rule of thumb. See our Repay debts or save? guide.
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 of your cash for the chance it'll grow quicker.
Whether you should be saving or investing depends on your circumstances. Over the long term, investing usually outperforms savings. Unfortunately, as investing comes with a risk, 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, investing is 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 that its value will increase, 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 – so read on. If you want to invest, see our Investing for beginners guide.
Four quick savings need-to-knows
Before you rush off to pour cash into the various levels of the 'How to start saving' fountain, here are a few key tips...
1. Most don't pay tax on savings interest – but a tax-free cash ISA may still be worth it for big savers
Since 2016 every basic-rate taxpayer can earn £1,000 in interest without paying tax on it (higher-rate taxpayers can earn £500, additional-rate taxpayers don't get an allowance). For full details, see our Personal savings allowance guide.
So, is there any point in getting a cash ISA?
If you won't pay tax on savings interest, a cash ISA may still be worth it. You should consider it if:
- Rates are higher on cash ISAs than normal savings.
- You may need access to your cash. Fixed cash ISAs give you access (for a penalty) whereas for fixed-rate savings, there's usually no access.
- You have A LOT in savings. If this is the case, you may be close to exceeding your personal savings allowance. If you do start paying tax on savings interest, any ISA interest doesn't count towards your personal savings allowance so you'll keep more of your interest from other accounts. See our Top cash ISAs guide for why it's still a decent option.
- You're an additional-rate taxpayer. Here, you don't get a personal savings allowance so it makes sense to go straight for cash ISAs to protect your interest from the tax office.
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. Here's the golden rule:
The first £85,000 per person, per financial institution is guaranteed.
So 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, shouldn't put more than £85,000 in any one institution, for total peace of mind. Spread it around instead. For more, read our full Are my savings safe? guide.
If you're in a couple and one of you pays tax at a higher rate then, providing you trust each other, put non-ISA savings in the name of the lower taxpayer and you'll take home more, as the lower taxpayer gets a higher personal savings allowance.
For those who aren't married/civil partners, there is a tiny risk if one of you died within seven years of this that there would be inheritance tax to pay on it.
Under-16s (and sometimes even under-18s) can often earn more in special accounts designed for kids.
Usually, the accounts are limited in some way, but there's a wide variety to suit every type of savings:
Top places to save money (the Savings Fountain)
Different types of savings have different rules on how much you can put in and when. To max your interest, you need to pour money where it'll pay best.
Think of it like a champagne fountain – put your cash into the best-paying savings vehicle possible, then when that's full and overflowing, fill up the next best, and so on.
This first stage of the Savings Fountain – Lifetime ISAs – is only for first-time buyers; if you're not a first-time buyer, skip straight to step 2.
Anyone aged 18 to 39 can open a Lifetime ISA (LISA) and save up to £4,000 a tax year into it, as a lump sum or by putting cash in when they can. The state then adds a 25% bonus on top. So save £1,000 and you'll have £1,250, and save the full £4,000 and you'll have £5,000.
First-time buyers can use the money and bonus towards the deposit for any residential property costing up to £450,000 once they've held the LISA for 12 months. (It can also be used for later-life saving – but be careful, as for most, saving in a pension is likely to be more lucrative.)
Bizarrely, some bank accounts' in-credit rates can beat easy-access savings accounts and ISAs – especially now all interest is paid to you without tax deducted. It's a loss-leader to attract banking customers – yet if you're prepared to switch accounts, it can be worthwhile.
If you don't qualify for a Lifetime ISA and haven't got a Help to Buy ISA, max the best bank accounts before you move on to any of the other options. If you're eligible for the Lifetime ISA (or you've already got a Help to Buy ISA), fill that first, then move on to bank accounts before the other options below.
Once you've filled any high-paying current account(s), start to trickle your money into regular savings. A regular savings account can pay high interest but it's only on a small amount of money.
Fixed-rate cash ISAs
Once you've maxed out regular savings accounts, move any money you don't need access to into an ISA.
A cash ISA is just a savings account where the interest isn't taxed (so you keep all of it). Anyone over the age of 16 in the UK can put up to £20,000 in an ISA each tax year (April 6 to April 5) and once in, it stays tax-free year after year.
Better still, with fixed-rate cash ISAs, unlike normal savings, you can get access to the cash within the term – though you'll lose some interest in penalties. Yet even if you withdraw early, these can still be winners.
Easy-access cash ISAs
If you know you'll need access to your cash then you'll need to go for an easy-access ISA. Here there are no withdrawal restrictions – you can get your cash when you want it.
Don't forget if you've got old ISAs built up over the years you can transfer them into a better-paying ISA. But NEVER just withdraw the cash and then pay it into the new ISA.
If you've still got money left, next consider whether you're prepared to lock it away without access – if so, you can get a higher return with a fixed-rate deal.
Do bear in mind if rates rise over the term you can't switch, so think carefully before fixing for longer than a couple of years.
With whatever money you've got left, anything you need access to, stick in an easy-access savings account, where you can deposit and withdraw cash at your leisure.
All the easy-access savings deals have a variable rate, so you need to monitor them to ensure the rate doesn't drop (switch away if it does).
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