What’s a savings account?
A savings account is a place to keep your money and earn interest on it.
It’s separate from your current account, but most banks will offer savings accounts in addition to their current accounts. There are also specialist savings providers.
There are lots of different types of savings accounts, like regular savers, instant access savers and ISAs. Interest rates and fees will vary depending on which type you choose, and the bank or building society you’re with.
How do I open a savings account?
You can open a savings account with your existing bank, with a new bank, or with a specialist savings provider. Most providers let you open an account online, but some might ask you to visit a branch or post a paper form/ID documents. And some might need you to have a current account with them to open a savings account.
You’ll need to think about which kind of savings account you want to find one that best suits your needs. Read about the different types of savings accounts to learn more.
Once you know which kind of account you want, you should check out different bank and saving provider websites to see what they’re offering. You can also use independent comparison sites to check what the best rates are at the time you want to open your account. But bear in mind savings rates aren’t the only important factor – consider things like:
How (and how often) you want to access your money
Whether there are any limitations
Other helpful savings features the provider offers, like scheduled deposits and roundups
How do I pay money into a savings account?
Most savings accounts will allow you to deposit money in a few different ways – as a one-off payment when you open the account, as a regular scheduled payment, or sporadically. You can also pay in money via bank transfer from another bank, by transferring it between accounts if your current and savings account are with the same bank, or by cash or cheque.
Depending on your savings provider, you might be able to make a deposit on their app, over the phone, on their website, or in-person at a branch.
How much money should I have in my savings account?
It all depends on how much money you’re looking to save, and what you want from your savings account.
If you can afford it, it’s generally a good rule of thumb to have enough money saved for 3 to 6 months of essential expenses. But if that feels out of reach or you’re not sure where to start, you could try using the 50/30/20 method to work out how much you should be saving. The 50/30/20 method involves allocating 50% of your income to needs, 30% to wants, and 20% to savings and debt repayment.
How does interest work?
Interest on savings accounts is the money a savings provider pays you in exchange for keeping your money with them, typically calculated as a percentage of your account balance over time.
Interest on savings accounts can be fixed or variable. It’s usually calculated daily and paid monthly or annually.
If a savings account has a variable interest rate, that means the savings provider can change the rate. Saving providers often change interest rates when the Bank of England’s base rate changes, but they might also change it for other reasons, like if the bank wants to offer a more competitive rate to attract new customers.
If a savings account has a fixed interest rate, the rate of interest you receive will stay the same for the whole term (typically 6 or 12 months). In exchange for the fixed rate, you agree not to withdraw your money for the duration of the term.
A fixed rate account gives you more security over the interest you’ll earn (though this can work against you if interest rates go up over your fixed term) but gives you less flexibility to access your money.
If your money is in a standard savings account rather than an ISA, you may have to pay tax on the interest you earn. Read more about Cash ISAs here.
What’s compound interest?
When you leave your money to grow over time and don’t touch your savings, compounding is the interest you earn on your interest. When you’re saving over a long period of time, it changes everything!
Here’s how it works: if you had £1,000 in savings and were receiving an interest rate of 5%, after one year you’d have £1,050. In year two, you’d receive 5% interest on your £1,050, so you’d end the year with £1,102.50.
In 20 years you’ll have £2,653 in your savings. You’ll have added £1,653 to the account via interest, without adding any further deposits!
What else do I need to know?
Here are some final handy tips to help you pick the right savings account.
Compare the Annual Equivalent Rate (AER) on savings accounts, instead of just looking at the interest rate. AER will give you a better idea of how much interest you’ll earn in a year, as it takes compound interest into consideration.
Review your savings account at least once a year to make sure it’s still working for you. If you decide to switch, just remember you might have to pay a fee for closing the account early.
Avoid keeping more than £85,000 with one banking group. Anything over this amount won’t be protected by the Financial Services Compensation (FSCS).
This isn't financial advice or personalised to you, and we're not recommending or suggesting you take any particular action. If you're in any doubt about what's right for you, then speak to an authorised financial advisor.
Tax treatment depends on individual circumstances and may change in the future.
The value of your investment can go up and down and you could get back less than you put in.
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