Your Guide to Saving



Putting money away for the future improves your life today – because it creates more security for you and your family.

When should you start to save?

Even if your income is really low, it’s a good idea to put money aside for the future. However, if you have debts apart from your mortgage, paying these off should take priority. No savings account gives you as much as the interest you pay on your debts, so having money sitting in a building society account makes little sense when you have long-term borrowing on your credit card.

Are you insured?

Saving is all about making yourself more secure, so making sure you’re properly insured should be your first step.

Emergency fund

Once you’re ready to save, start building up an emergency fund to cushion you against the impact of sudden expenses.

If you suddenly needed a new washing machine or boiler, for instance, you could dip into your emergency fund. Or if you lost your job, the cash would tide you over until you’d worked out what to do next. As a rule, your emergency fund should hold the equivalent of about three months’ salary or income – so £3,000 if your monthly income after taxes is £1,000.

If you have to use your emergency money, don’t forget to top it up again as soon as you can so it’s all there for the next time.

Choose a savings account

Keep your emergency fund in an account that’s easy to access – a no-notice account.

Tax-efficient saving

There are several ways to make sure you’re not paying tax unnecessarily on your savings:

  • Use a mini cash ISA – a tax-free savings account with an annual limit of £3,000
  • If you’re a non-taxpayer, don’t forget to fill in form R85 when you open a savings account – otherwise the bank deducts tax from your interest at source.
  • Get an offset mortgage – these mortgage accounts “offset” any savings you have against your mortgage. Because your savings are simply saving you mortgage interest, there’s no tax to pay (see our sections on Mortgages)


Types of savings account

Easy-access accounts

(aka no-notice accounts or instant-access accounts) – You can withdraw money without telling the bank in advance. These tend to offer some of the best interest rates these days.

Mini cash ISAs

Tax-free, but you can’t put in more than £3,000 in any one year. If you reach that limit and withdraw some, you can’t then replace it.

Notice savings accounts

You have to give advance warning when if you want to take money out – generally 60 or 90 days. In return for that, though, they can pay slightly more interest.

Fixed-rate accounts

(aka bonds and term accounts) – Your money must stay put for a set term of anything from six months to five years. The rate of interest is fixed, which may give you more than you’d get on an account with variable rates. But remember, if interest rates went up, you might lose out.

Regular saving accounts

You commit to making monthly payments of a fixed amount, usually over a year. In return, the rates tend to be higher. There are usually penalties for making more than one or two withdrawals a year. Look carefully, because the headline rate tends to include a bonus, so it may be less competitive when the bonus period expires.

Child trust funds

Savings and investment account for children. Children born after 1 September 2002, get a £250 voucher from the government to start the account. Interest or returns are tax-free, and the account belongs to the child, who can’t touch it until they’re 18.


Annual or monthly interest?

Most savings accounts pay interest once a year, but those that pay monthly actually give you more, because you can earn interest on your interest.


Stay competitive

Review all savings accounts at least once a year, and be prepared to switch to another account if the interest rates paid have fallen behind competitors.


Saving for Next Year

Now for the next layer – medium-term savings. This is money you put away for any larger outlays you might have in the next few years. These could include:

  • A deposit for a house or flat
  • Holidays
  • A new car
  • Home improvements
  • Putting your children through university

What would your medium-term savings be for?

You won’t need to get at this money immediately – and some of it may stay put for several years – so perhaps you could afford to let it grow in a riskier type of investment, such as shares. Read more in about in our guide to investment and risk.

If you’re not ready for that, choose a good savings account for your medium-term savings. This time it could be one that ties you in for a few months or more (see above).


Long-term savings

Saving for the long term is all about providing for retirement and old age. Does it seem a long way off, or all too close? Either way, now is the time to save for it, while you’re earning.


For most, the main part of any long-term savings plan is a pension, which gives you an income in retirement. If there’s an occupational pension scheme where you work, that’s probably your best option because employers usually contribute too. If there’s no occupational pension on offer, or you’re self-employed, then a personal pension plan is probably best. It’s a good idea to get advice from an independent financial adviser before taking out a pension plan.

Apart from a pension, your long-term savings plan should include savings that leave you with a lump sum of cash, so that that you have capital as well as income when you retire. This gives you more flexibility. Capital is useful for larger outlays such as holidays, cars, house repairs and gifts to children. And capital can always be turned into extra income if necessary.

The content of this article is intended for general information and personal use only. Nothing in this article should be construed as advice under the Financial Services and Markets Act 2000.

©2008 Rachel’s Guide to Money

Rachel Fixsen

Rachel Fixsen

Rachel is a freelance writer and journalist who's written extensively on all areas of personal finance and investment. She has been a regular contributor to the money pages of both The Observer and The Independent, and her book Kickstart Your Money: The Complete Guide to Managing Your Personal Finances was published by John Wiley in 2002. (ISBN: 0-470-84366-7)

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