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How to save a little and borrow less
Published 22 September 2016 by Linzi Nuttall
From regular savings accounts to ISAs, which is best for you?
It can be tough getting your finances straight and keeping your monthly budget in check. That’s why we often post tips on saving money and giving you ways to keep track of your spending. Budgeting more smartly can help stretch your money that bit further and make sure you live within your means.
Let’s take a look at how you can stay on top of your monthly budget and start to build up some cash for a rainy day.
Generally, it doesn’t make sense to save if you’ve got debts to clear. The cost of borrowing will be far higher than the interest you earn on your savings. But once you’ve cleared your debts, it’s a good idea to start saving – so that you can reduce your reliance on borrowing in future.
What to do with a little nest egg
When you get paid, put some money aside as savings straight away – don’t wait until the end of the month. If it’s only a small amount, you might not even notice this. A savings account will keep your nest egg secure and your money will be earning interest too. When you’re deciding on an account, be sure to shop around for the best rates and terms that suit you – sites like MoneySuperMarket list most savings accounts.
Tax free from April 2016
Though interest rates are at a record low, changes to the way savings are taxed were made from April this year. If you’re a basic tax rate payers (you pay income tax at 20%), you can earn up to £1,000 of interest on your savings tax free each year – which is more than enough for all but the super-rich!
A regular savings account
Some of the best interest rates to be had at the moment are on regular savings accounts. A regular savings account is exactly as it sounds: you put money in every month. They often impose restrictions, like limiting the number of withdrawals you make, but are a great way of getting you to adopt a regular saving habit. Remember that once the interest offer ends it pays to shop around to see if you can get a higher rate of interest elsewhere.
What about ISAs?
If your savings interest is tax-free from now on, why bother with an ISA? ISAs remain tax-free as long as you keep them – so you’ll be protected even if interest rates on savings rise again and push you over the £1,000 a year interest free savings limit. For example, if interest rates rose to 6% (the kind of level they were at before the financial crisis of 2007) then £16,700 in savings would take you over the £1,000 PSA if interest is at 6%.
Other savings options
Fixed rate savings accounts lock your money in for longer periods – so say one, two or three years. Because of this lock in, they typically offer a better rate of interest than cash ISAs and regular savings accounts. Before you commit to an account where your money is tied up for a longer period, be sure that you won’t need to get at the money in an emergency.
We understand that saving isn’t easy. But if you can build a nest egg, you’ll have peace of mind that you finances are strong enough to stand shocks without having to borrow money.