Session 4: Savings account

One benefit of careful budgeting is that it helps you to save regularly. But what should you do with the money that you save?

The answer to this question depends on your financial goal. If your goal is to use this money within the next few weeks, then probably keeping your money in your bank account is fine.

However, if you are saving to meet long-term financial goals (say in the next 5–10 years or later), then you should consider alternatives that make your money grow. Yes, money can grow, but not on a tree.

How does money grow? The key idea is that you can deposit your savings in a savings account that pays interest on your savings. You will learn more about interest rates in the next session.

There are many savings accounts available to you to make your money grow. The simplest types of savings accounts are those offered by banks and building societies that you see on the high street.

It is really important to compare the benefits that different savings accounts offer. For example, you should compare interest rates offered by different savings accounts.

Also, you need to know if there are any restrictions on withdrawing your money. For example, some banks may not allow you to withdraw your money from a savings account without prior notice.

Some bank accounts may offer a higher interest on money that is deposited for longer periods (say, 3 or 5 years). In this case, the bank will charge you for withdrawing money early. Finally, check if there are any other benefits that banks offer for opening a savings account with them.

You should also check if you can open a savings account without having a basic bank account. Some banks require you to have a basic bank account before you open a savings account with them.

Finally, do not forget building societies. You may get a better interest rate on your savings from a building society.

The government allows UK residents to open Individual Savings Accounts (ISAs). The key benefit of these accounts is that you do not have to pay tax on the income that you earn on your savings.

You must be at least 18 years old to open an ISA. The maximum amount you can put in your ISA is presently £20,000 per year.

If you are under 18, then your parent or guardian can open a Junior ISA for you. At present, a maximum of £9,000 can be deposited in a Junior ISA every year.

Note that you cannot control a Junior ISA in your own name until you are 16 years old. Your parent or guardian manages your Junior ISA on your behalf. But the money in your Junior ISA belongs to you.

Finally, to be able to withdraw money from a Junior ISA you must be 18 years old.

A Junior ISA can be either a Cash Junior ISA or a Stocks and Shares Junior ISA.

A Cash Junior ISA works like a savings account. Your savings earn interest depending on the interest that the ISA provider offers you. However, you do not have to pay tax on the interest earned on your ISA.

Stocks and Shares Junior ISAs are more complex than Cash Junior ISAs.

The money held in a Stocks and Shares Junior ISA can be invested in a variety of different assets, such as shares of companies like Marks & Spencer or bonds issued by the UK Government.

You will learn more information about what the stock market is later in this course.

Moving on

 

When you are ready, you can move on to Session 5: Understanding inflation and interest rates.

 

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Images:

565852: Image: Piggy bank with falling coins: Marynova / Shutterstock

565853: Image: Tree growing from coins: Qualit Design / Shutterstock

565854: Image: Scissors cutting 'tax': Solcan Design / Shutterstock

565855: Image: Piggy bank ISA: Teguh Jati Prasetyo / Shutterstock

565896: Image: Paper plane: Wirestock Creators / Shutterstock