Managing my money
Managing my money

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Managing my money

5.2.1 Variable rate and fixed rate savings products

In this audio a young professional, Ryan, ask for help from personal finance expert Jonquil Lowe in finding his way through the many savings products on offer.

We join their conversation as Ryan asks about a savings product he’s come across called a ‘term bond’.

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RYAN
There are so many ways to save. Jonquil, I'm really not sure where to start. How about this account? It's called a 'term bond', but look, the interest rate is quite a bit higher than on the other accounts.
JONQUIL
Well, it depends when you think you'll need your money back, Ryan. Some savings products, like this term bond, lock you in for a fixed period of say, 2, 3 or 5 years. That interest rate is fixed for the full period. It often is higher than you'd get on other accounts, but the drawback is you can't usually get your money back early, or if you can there's a hefty charge such as loss of 90 days' interest.
RYAN
Right, this bond has a 3-year term, so I'd get that interest rate fixed for the whole 3 years? That's a good deal isn't it?
JONQUIL
It could be, if interest rates on other accounts stay the same or fall. But if you think interest rates will rise, you'll be locked into that fixed rate and it might not look so good after a while.
RYAN
Maybe not for me then, and look, it says that interest rate is paid out monthly. I really want an account where I can just leave my money to grow.
JONQUIL
Yes, some of these fixed term savings products pay out the interest at regular intervals, usually monthly. That's especially useful for people who need a regular income, like pensioners, but not so good for you. If your interest is re-invested, your savings will grow faster, and there'll be more to pay out at the end. That's the magic of compound interest.
RYAN
I like that, the 'magic of compound interest'. I definitely want to see my money grow, but I don't want to see myself locked into a fixed interest rate that might fall behind other accounts. What else could I look at?
JONQUIL
Have you thought about maybe a tracker account?
RYAN
A tracker account? What's that?
JONQUIL
With many accounts, the rate of interest varies when the Bank of England changes its official interest rate or 'Bank Rate' as it's known.
RYAN
Oh yes, I've heard about Bank Rate on the news.
JONQUIL
That's right. So, tracker accounts are a type of variable rate savings account.
RYAN
Variable rate?
JONQUIL
Yup. Variable rate simply means the interest rate tends to change over time. The changes are broadly in response to changes in Bank Rate, though variable savings rates are sometimes quick to fall but slow to rise. With a tracker account, there is a specific link to Bank Rate. That means if Bank Rate goes up, so does the interest rate on your account. Of course, if Bank Rate goes down, then your interest rate falls.
RYAN
And do these variable rate accounts have penalties if I want my money back?
JONQUIL
They do if they're notice accounts. So, those are accounts that typically pay a slightly higher interest rate, and you have to give the bank or building society a specified notice period for withdrawal - say 30 days or 90 days - otherwise you lose some interest, though some accounts may give you one or two penalty-free withdrawals every year. But there are plenty of instant access accounts that let you take your money out whenever you like without any penalty at all. They're especially suitable if you're looking for a home for your rainy day savings, and the market for instant access accounts is pretty competitive, so sometimes they give you a better interest rate than notice accounts anyway.
RYAN
That's all great advice, thank you so much Jonquil.
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The other savings options that are described are trackers, variable rate accounts and notice accounts.

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