With interest rates still low following the 2008 financial crisis, it can be challenging to know where to place savings to generate the biggest returns possible. But taking the time to think about what you want to achieve and considering a financial plan can help you pick out the right option for you.
According to Charter Savings Bank, 53% of adults have either started to or are considering saving more than in previous years. As they strive to get on the property ladder and progress in careers, it’s perhaps not surprising that younger generations are more likely to be boosting their saving habit. Some 71% of 18-30-year olds hope to increase their savings over the next 12 months.
If you’re thinking of upping your savings, where should you put the money? It’s a personal choice and one that needs to reflect your overall financial plans, as well as what you’re saving for. There are some key areas to think about in order to find the right home for your savings.
The first thing to think about is what you’re saving for. This will have a direct impact on two of the elements to consider below: time frame and accessibility. However, it’s an important consideration for other reasons too.
First, having a goal in mind can help keep you on track. Without a target in mind and something to look forward to, be it a big-ticket purchase or the feeling of financial security, it’s easy for good intentions to be forgotten. Goals help give your actions some direction and you’ll know that even a small deposit in a savings account is progress towards a bigger target.
Secondly, a goal will also affect how likely you are to want to take a risk with savings. If, for example, your savings are earmarked for paying for a child’s education, you may opt for a more conservative approach. On the other hand, you may be willing to invest savings that will enhance your retirement lifestyle when the cost of living is already taken care of.
2. Time frame
This ties directly to what you’re saving for. Are you hoping to spend the money in a year’s time to go on holiday? Or are you saving for retirement that’s still 15 years away? This will have an affect on where you should place your money.
There are savings accounts that will offer you a higher interest rate in return for locking your money away for a defined period of time, such as one, three or five years, for instance. Whilst the higher interest rate may be attractive the accounts will be of little use if your financial plans mean you want to access them sooner.
Setting out a time frame not only means you can pick an account that suits you, it means you can plan too. With a defined target and a time frame in mind, it’s easier to set out how regular payments will be and the amount.
Economic uncertainty means some people are reluctant to invest. The research suggests just over a quarter of Brits are thinking of cashing in investments such as shares and bonds as a way to reduce risk. However, if your time frame is longer than five years, investing provides you with an opportunity to potentially increase returns over the long term.
How likely are you to need access to your savings before the end of your time frame, and what will happen then?
If you’re building up an emergency fund, you’ll want to choose an easy access account from the beginning. After all, it’s there to provide you with financial security when the unexpected happens, and who knows when that may be? Even if you’re saving for a particular goal some way off, do you have other funds to fall back on if needed? Looking at your savings plan in the context of your wider financial situation can help you assess how likely it is you’ll need access.
If access isn’t needed, again, choosing an account that will lock your money away for a defined period of time or investing, assuming this matches your time frame and risk profile, could provide greater returns.
With a goal in mind, you should set out how you’ll reach this. For many, regular deposits will be the preferred option, allowing them to spread out payments. However, you may also want to deposit lump sums or kick off your saving with a higher contribution. Some accounts will offer higher interest rates if you make monthly deposits or will have a limit on how much can be contributed. As a result, it’s a good idea to set out how frequently and the amount you’ll be depositing before searching for an account.
If you have any questions about your overall financial plan, including how to get the most out of your savings, please contact us.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. The Financial Conduct Authority does not regulate deposit accounts.