Unless you’re paying off expensive debt, it’s always a good idea to put a portion of your monthly income into a high-interest regular saver account.
However, even if you’ve compared the options to find the one with the best rate, you may end up earning less interest than expected — and Martin Lewis has just revealed why.
Ahead of predicted cuts to the UK base rate, the Money Saving Expert (MSE) founder shared advice on savings in the latest edition of his newsletter, with a run-down on why your annual return can seem like ‘less than it is’.
‘At the end of the year, many feel they’re being conned when they see the interest,’ he wrote, using an example of someone depositing £300 a month at 7% interest to demonstrate the issue.
Over the course of 12 months, this adds up to £3,600. And since 7% of £3,600 is £252, you might assume that’s what you’ll receive on top of your nest egg.
But the actual amount would be more like £139, because interest is typically accrued on your balance at the end of each day, regardless of how often it’s paid out.
‘You’ve not had £3,600 in for a year; you’ve been dripping it in each month.’ Martin explained. ‘In fact, your average balance over the year is roughly half that – £1,800 – so the interest will be closer to 7% of that.’
While this may make regular savings seem less attractive though, the financial guru urged people not to be put off, adding: ‘Even though you only save in increments, the higher rates mean you are still getting unbeatable interest on the money in the account. If that’s new money from your regular income, you can’t beat it.’
The caveat? Whether you’ve already got a big lump sum or are just starting out on your savings journey, getting to grips with how interest works is vital to ensure you make your money go further.
According to Hargreaves Lansdown, 27% of people don’t know what interest rate they’re getting on their savings, with a Building Societies Association (BSA) survey finding 34% of UK savers never compare their rate to others available in the market.
To help you along, MSE lists the top-paying regular savings accounts and offers guidance around which options are best for your needs. Bank of England’s savings calculator can also give you a clearer idea of how much your pot will grow in time.
Looking to make the most of your savings?
As part of his savings ‘masterclass’ newsletter focus, Martin had an array of additional advice for readers, from using up your tax-free ISA allowance to taking advantage of multiple accounts with different providers (all of whom offer different benefits).
If you want to ‘maximise every penny’ but aren’t sure where to start, Martin’s analogy of a ‘savings “champagne” fountain’ – where you ‘pour your cash into the best possible product, then when it’s full, move to the next one down’ – makes it easy.
First off, there’s Help to Save. This government-backed scheme is open to anyone on Universal Credit who also does paid work, allowing you to put away up to £50 a month and withdraw your money at any time. Then, after two years, you get a tax-free bonus of 50% on the most you had saved at any point.
Next up, the Lifetime ISA (LISA). If you’re aged between 18 and 39, you can open one of these accounts, putting away up to £4,000 a year tax-free and receiving an extra £1,000 to put towards your first house or retirement.
Then, at the bottom of the champagne tower, regular savings accounts.
Martin warned that millions are ‘pants’ rates currently, but can ‘easily ditch, switch and gain’. However, he recommends doing so before next Thursday, when analysts believe the Bank of England base rate could be cut from 4.25% to 4%.
‘UK interest rates are likely on the move,’ he added. ‘And that means savers need to check what they earn now.’
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