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What's the best way to save

Questions you need to ask yourself

If you’re thinking about saving, it can be difficult to decide on the best place to put your money. You will need to ask yourself some basic questions such as:

  • what do you want the money for
  • when are you saving for - the short-term or the long-term?
  • are you willing to take a risk with your money to earn more interest, or would you prefer to know that your money is safe but will earn less interest
  • how quickly do you need to be able to get hold of your money in the event of an emergency?
  • how will your tax position affect your savings?

If you're willing to take a risk with your money to earn more interest, you may want to think about investing in the stockmarket rather than saving in a bank and building society account. It's usually best to invest in the stockmarket only if you're saving for the long-term, rather than the short-term.

This page helps you to think about some of the questions you'll need to ask yourself about saving and investing your money and to work out what the best option might be for you.

Before you look at this page, you should look at Why save which helps you work out your reasons for saving. It also helps you to think about whether you need to save. It’s almost always better to save money, but sometimes it might not be possible and you may need to think about other alternatives.

You should also look at Can I afford to Save and how much? You need to be in a good financial position to save, which means taking care of other areas of your finances as well. You need to have a good understanding of your financial situation to work out how much spare money you have to save.

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When are you saving for

Once you have worked out what you are saving for you will be able to work out whether you will need the money in the short- term, or in the long-term.

Saving for the short-term usually means that you will need the money within the next five years. Saving for the long-term usually means that you will need it in five years time or more.

You should also think about whether you want a saving or investment that pays you an income now, or whether you want your money to grow over a long period of time to provide you with a lump sum in the future.

Short-term savings

You might want to save in the short-term for things like, holidays, Christmas, a new car or the deposit on a new home.

If you're saving for the short-term, you will to want put your money somewhere where you can get hold of it easily and also be sure that it's there when you need it.

The types of account that you can look at if you are saving for something you need soon are usually bank and building society savings accounts. These are also called deposit accounts. You can also look at National Savings and Investment (NS&I)accounts, which are available through the Post Office, online and by phone. These are government owned and completely safe.

Another way to save for the short-term is through a cash Individual Savings Account or ISA.

Long-term savings

Long-term savings are for things like your children's college fees or your retirement. These are things that are not likely to happen for at least five years or more.

The way you choose to save for things like these will depend on how safe you want your money to be and how much risk you are willing to take with your money.

You can choose either to put your money into a bank and building society account,or to invest it in the stockmarket. A bank or building society account is a safer way to save because you are guaranteed to be able to get back at least the money you put in. However, you may earn less interest.

Investing in the stockmarket is a riskier way to save because it's possible to lose money rather than make it. However, the longer you invest for, the more likely you are to make more money than if you had saved with a bank or building society. This is called giving you a higher return.

If you have money to invest for the long-term, you can also use your stocks and shares ISA allowance.

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Bank and building society accounts

With a bank or building society account, you pay in your money and in return for keeping it there, you get a small reward. This is known as interest. Interest can either be fixed or variable. If the interest is fixed, it will stay the same over a certain period of time. If the interest is variable, the interest you get can go up or down.

A bank or building society account is a safer way to save because you are guaranteed to be able to get back at least the money you put in. If the bank or building society goes out of business, you are guaranteed to get back all the money you put in, up to a maximum limit of £85,000.

Banks and building society accounts are usually better if you are saving for the short-term, rather than the long-term.

This is because you might need to get hold of your money quickly and it's easier to do this through a bank or building society account than if you invest it in the stockmarket.

However, if you put your money into a bank or building society account for a long period of time, the interest you earn on your savings may be less than the increases in the cost of living. This is known as inflation. When inflation is taken into account, you could end up with less money than you started with.

If you want to save money over the long-term, it might be better to invest it, rather than put it into a bank or building society account. However, investing in the stockmarket is a riskier way to save because it's possible to lose money rather than make it.

If you are really unhappy at the idea that you could lose money, you may want to stick with bank and building society accounts.

You can get a better rate of interest in some notice accounts where you have to tell the bank in advance if you want to take out your money. If you open one of these accounts, make sure you check the rate you are getting regularly. You might need to switch your account to make sure you are always getting the best deal.

You could also check out some of the products on offer from National Savings and Investments, which are guaranteed by the Government.

For more information about notice accounts, go to the Money Advice Service website at: www.moneyadviceservice.org.uk.

There are hundreds of savings accounts to choose from and the best interest rates on offer change often. There are also different account types, including instant access or 'easy saver' accounts, notice accounts and term accounts.

For more information about the different types of bank and building society savings accounts, go to the Money Advice Service website at: www.moneyadviceservice.org.uk.

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Credit unions

Credit unions are a good way to save if you can only afford to put a very small amount of money away.

A credit union is a self-help co-operative whose members pool their savings to provide each other with credit at a low interest rate.

They offer loans at very competitive rates but you usually have to be a regular saver.

For more information about credit unions, see Credit Union loans.

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Investments

If you are happy to take some risk with your money and want to save for at least five years, one option you could think about is investing it in stocks and shares.

Stocks and shares are bought and sold ( or traded) on the stockmarket. The most well-known stockmarket listing (or index) in the UK is the FTSE100 which lists the UK’s top 100 performing companies.

When you buy a share, the company takes your money and invests it. If the company does well, you both make some money. If it does badly, you risk losing money. The value of your shares can also be affected by world economic and political events.

Investing in stocks and shares is a riskier way to save because it's possible to lose money rather than make it. However, the longer you invest for, the more likely you are to make money and earn more from your investment than if you had saved with a bank or building society. This is called giving you a higher return.

Investing in the stockmarket also means that you won't be able to get at your money as easily as if you had saved it in a bank or building society account. You will need to think about whether you can get at money in other ways if you need to in an emergency.

For more information about investing in stocks and shares, see Investing in stocks and shares.

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How much have you got to save or invest?

The amount of money you have to save or invest can affect the amount of interest you earn.

You may want to invest a lump sum which you've got from selling your home or getting a bonus at work. On the other hand, you may want to put smaller amounts of money away on a regular basis.

You will need to choose carefully to make sure you get the best rate for the amount of money of money you have.

Lump sums

If you have a large lump sum to save, you can look for a bank or building society account that offers high interest rates. This means you can earn interest while you decide what you are going to do with it.

There are building society accounts especially designed for investing lump sums but it's also worth checking whether you can get a better interest rate in a regular savings account.

If you can get a better rate in a regular savings account, you could put your lump sum into the highest rate lump sum savings account and then move it gradually into a regular savings account with a higher interest rate. This means that you won’t lose out on any interest.

Some savings accounts will also let you start with a lump sum and then add regular amounts. Often, the highest rates only last for a limited time, so you may need to keep moving your money to get the best deal. But watch out for any restrictions on the account that mean you will lose interest if you take out your money early.

If you pay tax, don’t forget to use your cash ISA allowance too.

Remember, it's a good idea not to put more than £85,000 into any one savings account. This is because if a bank or building society were to go out of business, as long as you have less than £85,000 in your account, you would always get your money back.

If you're willing to take more of a risk with your money in the hope of earning more, you could also think about investing your lump sum into a stockmarket investment.

For more information about stockmarket investments, see Investing in the stockmarket.

If you have a large amount of money to save or invest, you might also want to consider putting it in more than one place. The way you save or invest the money will depend on whether you want it for the short-term or the long-term and also on how much risk you're willing to take with your money.

Your options could include putting some into a high interest bank or building society account at the best rate you can get but where you can get at your money easily if you need to. You could then put some into a longer-term stockmarket investment and use the rest to pay off your mortgage if you have one.

If you have a large sum to invest, it's a good idea to take some financial advice on your options.

Regular savings accounts

If you have money to save on a regular basis, you should think about opening a regular savings account. These accounts give you a higher rate of interest than if you are only able to pay money in occasionally whenever you have extra to spare. You usually have to pay in between £10 and £500 a month to get the best rates. You should also get a small additional bonus for saving every month. However, if you miss payments or take out your money early, you might lose some of the interest you have earned.

Regular savings accounts are available through most banks and building societies, and some are internet or postal based. Accounts may have ‘regular saver’ in their name but others won’t, so check the small print to find out whether you will get extra interest if you save regularly.

The best rates of interest change frequently, so use a comparison website to find out which accounts are paying the top rates. Once you have opened your account, check that your rate doesn’t go down. If you want to change accounts, make sure you won’t lose interest if you try to take out your money early. To find out more about comparing regular savings accounts, go to the Money Advice Service website at: www.moneyadviceservice.org.uk or www.moneysavingexpert.com.

If you're willing to take more of a risk with your money, you can also save regular amounts in stockmarket investments.

For more information about stockmarket investments, see Investing in the stockmarket.

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Which savings are best for your tax position?

If you pay UK tax, you also have to pay income tax on the interest your savings earn. Basic rate taxpayers pay 20 per cent and higher rate taxpayers pay 40 per cent. It is therefore worth looking at tax free savings accounts to reduce your tax bill.

Individual Savings Accounts (ISAs)

One of the best ways to make your savings tax free is by putting them into an Individual Savings Account or ISA. ISAs are savings accounts which pay interest. However, unlike other savings accounts, you don't pay any tax on the interest you earn. You can open an ISA with a bank, building society or National Savings and Investments.

There are two types of ISA:

  • a cash ISA and
  • a stocks and shares ISA.

For the tax year 2011/12, you can put up to £10,680 into ISAs. Up to £5,340 of this can be in a cash ISA. If you don’t pay into a cash ISA, you can put your entire limit into a stocks and shares ISA.

If you live with a partner or are married, you both have tax allowances. This is the amount of money the government lets you earn before you have to start paying tax. If one of you pays tax and the other doesn’t, or if only one of you pays tax at the higher rate, it is worth using up your ISA entitlements and ensure other savings are in the name of the account holder who pays least tax.

For more information about ISAs, see Individual Savings Accounts (ISAs).

For more information about tax allowances, see Income tax allowances and amounts.

National Savings and Investments

Another tax-free option for investing money is with National Savings and Investments (NS&I). They offer a series of index-linked and fixed interest savings certificates. You can save between £100 and £15,000 in each issue and there are several issues a year. For more information about these certificates, go to the NS&I website at: www.nsandi.com.

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Which savings are best for your religion or principles?

You may want to save in a way which fits in with your religious or moral principles.

For example, you may want to save according to Islamic principles. Several high street banks offer accounts which fit in with the principles of shariah law. The Islamic Bank of Britain offers savings accounts, mortgage alternatives and other personal finance products and is regulated by the Financial Services Authority (FSA). For more information go to www.islamic-bank.com.

You may want to find out about savings and investments which fit in with your moral principles. For example, you may want to avoid saving with banks which invest in industries such as nuclear power, tobacco or arms.

You can find out more about savings and investments which fit in with your moral principles at: www.yourethicalmoney.org or the website of ethical bank Triodos at www.triodos.com.

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Further help

On Adviceguide

The Money Advice Service

The Money Advice Service is a free, independent service. Their website has lots of useful information about financial products, including comparison tables. Go to: www.moneyadviceservice.org.uk.

Ofgem

Ofgem keep a list of approved energy price comparison websites which you can find on their website at: www.ofgem.gov.uk.

National Savings and Investments

National Savings and Investments offer a number of financial products which are guaranteed by the Government. They are available through the Post Office, online and by phone. For more information, go to: www.nsandi.com.

Independent financial advice

For help in finding an independent financial adviser, contact one of the following organisations:

Independent Financial Promotions (IFAP)
Website: www.unbiased.co.uk

Institute of Financial Planning (IFP)
E-mail: enquiries@financialplanning.org.uk
Website: www.financialplanning.org.uk

Personal Finance Society (PFS)
E-mail: customer.serv@thepfs.org
Website: www.findanadviser.org

Moneysavingexpert website

The money saving expert website has lots of useful financial information, including price comparison tables for different savings accounts. Go to: www.moneysavingexpert.com.

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Citizens Advice

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