With today’s interest rates at an all time low, you may be disappointed with what little money you receive from saving your hard earned income. But do not dismay, there are savings plans that are still giving some interest that is worth having.

 

What do you think is a savings plan? If you think it is simply an account which is separate to your current account, with perhaps a promise of more interest, then you are perhaps pointing in the right direction, but there’s more to it than that. By reading this short article, you will learn how savings plans operate.

 

The first thing to realise, is that there are three distinct types of savings plans, namely:

 

An Instant savings plan does operate in a similar way to a current account, in that you can make deposits and withdrawals pretty much when you want. The expectation is that you would receive a higher interest rate than a current account, but in today’s market you will be hard pushed to find anything giving more than 1%, and most are closer to 0.1%. An instant savings account can be good if it encourages you to save money, but due to the poor interest rate there are better places to put your money.

 

A Regular savings plan works a bit different, since the way the account operates is regimented. You will generally put in a fixed sum, each month, usually by direct debit. The amount of the fixed sum is agreed when the account is opened, but you cannot change this amount, and you cannot take any money out until the end of the year, at least not without penalties. This is a much better way of saving, since you will soon see your savings grow, and before you know it, you will have saved a nice little sum! Banks also prefer this method, partly because less administration is involved. In return, banks will give a better interest rate, and you can find rates of between 2% and 4%. This may not sound like a lot, but it is still worth having, and all the time you will be building up your savings.

 

Note that the amount of regular monthly savings is usually restricted. There will be a minimum amount of between £1 and £25, and also a maximum which is often capped at £250 per month, but there are some where you can deposit upto £500. The actual restrictions will be clearly stated by the bank for the specific plans on offer.

 

The final third type of savings plan is a Deposit account. Here, a lump sum is put into the account, and then you don’t touch it! In other words, you don’t put any more in, and you don’t take any out. The account will be for a fixed term, often two, three or five years for example. At the end of the term, you get your lump sum back, plus the interest accrued. Since there is even less administration for the banks then you can find accounts offering more then 4% interest, even in today’s low interest world. Note there is likely to be a minimum of perhaps £1000 deposit, or higher. The maximum is also limited, but it is usually a very high amount, perhaps £1,000,000!

 

In summary, the three types of account are: Instant, Regular and Deposit. Banks may offer savings plans with different names, such as easy access instead of instant, or bond account instead of deposit, but they will generally fall into one of these three categories.

 

The way I would use these accounts, is to decide how much I can save each month, and then use a comparison website to find a suitable regular account to open. I personally wouldn’t bother with an instant savings account. After one year, I can take out all the money that I have been placing into the regular savings account, plus interest, and then put the entire sum into a deposit account. I can then continue with the regular savings account for the next year. The aim is to have three deposit accounts, all with a three year term, but staggered, so that only one deposit account matures each year. Now once a year, I take the money from the regular savings account, add it to the maturing deposit account, and reinvest in a new three year term deposit account. Then on retirement, I stop the regular savings, and each year I still reinvest the maturing deposit account, but I take the interest it has made out, and use this as an income to supplement my pension!

 

So now it is your turn. Your task is to decide now, how much you can save each month and start the search for a suitable regular savings account. Then decide on a simple, low maintenance, long term plan, depending on your situation. Perhaps you want to save for retirement, for your children’s future, or for a mortgage deposit on a house.

 

Whatever your plan, keep it simple, and once started, it will give you a nice warm comforting contented fuzzy feeling inside, now that can’t be a bad thing!