No one ever got rich off savings. Nonetheless, savings are part of a solid investment strategy because the money set aside provides a bit of 'cash insurance' in the event of an emergency. Having some savings in place makes it possible to address those emergencies without having to liquidate more profitable investments.
Many financial experts have said that consumers should save at least one month's salary in the bank. It has also been pointed out that saving is an investment in oneself. At least to the extent that having a full month's salary set aside provides at least some cushion in the event you lose your job, you are unable to work due to illness or injury, you have to replace the boiler, etc. It is hard to argue against savings in a world that so readily relies on credit cards and personal loans.
Please understand that putting money aside in a savings account is not much of an investment. An investment is a financial vehicle through which consumers participate in a business transaction intended to provide at least a modest financial return. When you put your money into savings, you are not engaging in a profit-making business venture. You are depositing money with the bank in exchange for a minimum amount of interest. At current rates, most savings accounts don't even break even. The minimal interest earned is all but negated by inflation and taxes.
Simply put, savings is a vehicle by which you can save money for the future. Saving and investing are not the same thing.
Different Kinds of Savings Accounts
We have many different kinds of savings accounts to choose from in the UK. Actually, the sheer volume of differences between accounts offered by banks and building societies would make it impossible to list them all here. Below is a rather brief list of the most common kinds of savings accounts consumers prefer:
- Easy Access – An easy access (aka instant access) is one of the more liquid savings products. These accounts pay slightly higher interest rates, and you can access your money at any time.
- Regular Savers – This kind of savings account involves agreeing with the bank to contribute so much every month. The bank also limits access to your cash for a particular term. In exchange, you get a better interest rate.
- Fixed Term Account – The fixed term account is the savings equivalent of a bond. You deposit money for a fixed amount of time and at a fixed interest rate.
- Index-Linked – An index-linked savings account is similar to a fixed term account in that you agree to deposit your money for a specific term. The difference is that the index-linked account offers a variable interest rate linked to one of the popular market indexes.
- Cash ISA – The cash ISA is a tax-free savings vehicle structured as either a deposit or simple savings account. The amount of interest you earn is modest, but it is tax-free too. However, there are limits as to how much you can deposit each year.
- Stocks and Shares ISA – This account is similar to the cash ISA except that the money deposit is used to purchase penny stocks. Typically, this would constitute an investment. But the rate of return is such that it's a lot closer to traditional savings.
Implementing a Savings Strategy
There is little doubt that saving is something every family and single individual should be doing. We do not live in a perfect world, and there are times when financial circumstances dictate spending some money outside of the normal budget. If you don't have any savings in place, the only way to cover the unplanned expense is through credit. Better to save and earn at least a little bit of interest than spend on credit and the interest payments that come with it.
The best way to implement a savings strategy is to set aside a certain amount from every pay cheque. By considering savings as a mandatory deduction – just like money deducted for your pension, for example – you can adjust your budget so that you eventually learn to live without that money to pay your regular bills. Saving will then become a regular habit.
Obviously, it is imperative that you compare savings accounts of different kinds between multiple banks and building societies. You might just as well get the best return and the most favourable terms if you are going to put your money into savings. Start by putting away what will eventually accumulate into a full month's salary, then evaluate your financial situation based on how much more you can afford to save versus how much money you want to put into other investments.