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Savings Accounts Key Factors

Savings Accounts Key Factors

Category: Savings

Updated: 02/12/2008
First Published: 01/12/2008

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

As with all financial products, there are a number of things to consider when you're thinking about starting a savings plan. Here's the Moneyfacts.co.uk guide.

Interest Rate

Clearly the interest rate is a very important factor in determining which savings plan you choose. But you need to think about more than just the percentage rate. Ask yourself:

  • Is the rate fixed or variable?
  • Is it a headline grabbing short term rate?
  • Does the rate include any element of bonus for a short period?
  • Does the provider have a good record of consistency in interest rates?

Notice Period

Make sure you don't tie yourself into an inappropriate notice period. Notice periods for withdrawals from savings accounts can typically be 7 days, 30, 60 or 90 days, but some plans have different notice periods.

What are you saving for?

The range of different types of savings accounts available allows you to pick the right one depending on what you're saving for. If you just want to have a pot of money for emergencies, you would need a no-notice account. If it's for holiday of a lifetime or other planned expenditure you could probably benefit from the higher interest available with a notice account as you'll be able to plan when you want to withdraw the money.

When do you think you'll need the money?

If you don't know when you'll need the proceeds from your savings, you won't want to lock yourself into a account with a long notice period or a fixed rate bond, but rather you'll want instant access.

If you have a lump sum to invest and know when you want the money, a fixed rate bond may be for you. These fix the interest rate for a specified period. Some of these account let you add more to the savings you've already made, but others don't.

Do you want to take an income from your savings?

If you want to supplement your income, accounts which pay interest monthly may be better for you than those that pay each year. If you take all your interest as income you won't be able to benefit from compound growth which is where you earn interest on your previous interest payments.

Do you want to take any risk with your savings?

Deposit savings accounts don't involve the risk of fluctuating values like investment products do, and with fixed rate products you are guaranteed the return advertised. The main risk with these products is 'inflation risk' where the inflation rate is higher than your interest rate so the value of your savings actually decreases. In times of increasing inflation you should make sure your savings are still ahead of the game.

You also give up the chance of potentially higher returns available from stock market based investments. If you are willing to take some investment risk, and are saving for at least 5 to 10 years you may want to put some of your savings into a stocks and shares ISA, unit trust or Oeic.

Do You Have Loans Outstanding?

While its always a good idea to have an emergency fund available, its worth comparing the interest rate you get from your savings against the interest you are paying on any outstanding loans. If your debt interest is higher than savings interest, you may be better off paying your loan early before you start saving as what you earn is outstripped by what you have to pay out.

What to do Next

Now you're aware of all the considerations, compare savings accounts to check the latest rates and deals on offer. Moneyfacts.co.uk has also put together a range of savings accounts guides to help you understand the different sorts of accounts available.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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