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MSE’s Academy of Money
MSE’s Academy of Money

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8 Drawing up your savings strategy

With all this knowledge to hand let’s consider how you can devise your strategy for your savings.

The image is a photograph of two women with a laptop open in front of them. They are both looking at the screen intently with one woman pointing at the screen. Behind them is a bookshelf which is full of books.
Figure 10 Comparing savings strategies

The key is to match the savings accounts you choose to your reasons for saving and, of course, to pick the highest rate possible. We will try to help you do that below, but it must be said there is no one answer to the question ‘Which savings account should I choose?’ as there is so much complexity in drawing up the many pieces in the jigsaw of what is available and what your circumstances are.

Instead, it is best to work on more general principles rather than fixed rules on what you should or shouldn’t do. Here goes…

  • Firstly, you don’t need to have just one savings account. You can mix and match as you may, for example, want to keep some for the long term in a fixed-rate account and some in an easy access account for drawing on whenever needed. Or another combination altogether.

    Plus, if you have more than £85,000 in savings, then you definitely want to spread it between different financial institutions so your money is safe.

  • Carefully consider your tax situation to help you decide between standard savings accounts, cash ISAs and Premium Bonds. Remember, 95% of people do not pay tax on their savings so for most people, the right approach is simply to go for the best rate, regardless of whether it is a standard account or an ISA – that can be the literal interest rate or the Premium Bond ‘rate’.

    However, even if you don’t pay tax now, consider that if you may soon do (if you’ve lots of savings and/or are close to going up a tax band) that by saving in an ISA, your money is tax-free forever (unless the rules change).

  • Access to your money and choosing between fixed vs variable rates are also important, though these decisions go hand-in-hand given the way accounts are structured.

    The first key point to consider is whether you may need access soon. If that’s the case then easy access is naturally best, but keep an eye out in case the rate drops given it’s variable.

    If you don’t need easy access then the best rates are normally in regular savers, but you’re limited in how much you can put in.

    If you want rate security for the long run and don’t need to touch your money for a while, then a fixed rate gives you that certainty, plus it normally offers higher rates to start with than an easy access account, but you won’t benefit if rates rise.

  • Another consideration is whether you want to open a current account to get a better rate. Do note that as we were writing this course, the availability of really good current account savings rates was dwindling, but they’re worth checking out in case the market had improved by the time you read this.

    If the rates do beat normal savings accounts when you read this, then great. But note that you may well need to effectively operate them as your main current account to get the rate, which means paying a certain amount in each month and having direct debits going out.

  • If you are saving for a first home and you are aged 18-39 then LISAs are a no-brainer for most people, though only open one if you are sure you will use it for that purpose and your home will cost less than £450,000, otherwise you won’t reap the rewards.

It’s now time for a quick quiz and then you’ll start to learn about investment products. You may never invest in these directly but almost certainly you are an indirect investor – particularly through pension schemes. So, it makes sense to learn about the investments being made on your behalf by those that manage these funds.