Make The Most Of Your Savings

Cliff D'Arcy tells us about his transition from being a bad borrower to a sensible saver and his favourite savings account.

One of the most rewarding moments of my life was when I went from paying interest to earning it. Alas, from the moment I arrived at university in 1986, I began to overspend and, soon afterwards, to borrow. My spending spree continued until the late Nineties, when I finally realised that my addiction to borrowing was out of control and was threatening my financial future. 

Fortunately, I got to grips with my bad habits and, before the turn of the century, I had switched from being a bad borrower to being a sensible saver. At first, my goal was to build up an emergency fund of a few months' expenses, which would act as a `cash cushion' against hard knocks. Hence, I started putting aside some spare cash each month into a tax-free savings account known as a cash ISA (Individual Savings Account).

However, it's only possible to save a maximum of £3,000 per tax year into a cash ISA (£3,600 from 2008/09 onwards). Thus, as my savings crusade gathered pace, I began searching for a home for my additional contributions. Over the years, I moved this `hot pot' of money between several leading savings accounts, in order to take advantage of table-topping rates of interest. These days, when hunting around for an ideal home for my savings pot, I look for three key features:

1.    The very highest interest rate. Naturally, this is my primary concern, as I want my money to work as hard as possible. These days, with the Bank of England's base rate at 5.75% a year, I aim to find a savings account which pays at least 6% a year before tax. Otherwise, after taking tax and inflation (rising prices) into account, my money is barely growing at all!

2.    Easy access to my cash. There's no point putting my rainy-day money into an account which charges withdrawal penalties or doesn't pay interest in any month during which I make a withdrawal. When an unexpected bill arrives, I refuse to be penalised for dipping into my cash, so I steer clear of notice accounts in favour of easy-access or instant-access savings accounts.

3.    Some form of interest-rate promise. At the top end of the savings market, competition is intense as firms battle it out for our business. Thus, some providers give themselves an edge by offering interest-rate guarantees, some of which last for two or more years. In most cases, these accounts guarantee to match the base rate, although a few go further by pledging to beat the base rate.

So, given the above requirements, which is my favourite savings account at present? For the record, I opened an online account last year with Icesave, the Icelandic bank which has been wowing savers across the UK. This account offers the following:

•      A market-beating rate of interest, which increased just yesterday to 6.30% AER. This rate is paid on balances between £250 and £2 million.
•      Easy online access around the clock, with no penalties or catches when I add or withdraw money.
•      A rate guaranteed to beat the base rate by at least 0.25% until October 2009 and then not to be lower than the base rate until October 2011.

So, there you have it: my favourite savings account. If you think that you can do better, or you want to secure even higher rates on your spare cash, then try using the search engine in our savings centre. Whichever savings account you settle on, it's bound to be better than the current home for your cash!

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Even better than savings?

Icesave's current interest rate of 6.3% is a great return, well ahead of current inflation.

However, it's possible that you could obtain an even better return than that -- from the stock market. That's because shares have historically generated a return of around 11% a year over the long-term.

Of course, the downside is that shares are far riskier than a savings account.

So what's the right option for you?

If you think you might need the money within the next five years, steer clear of shares and go for a table-topping savings account.

And if they prospect of possibly losing money makes you feel uncomfortable, then go for a savings account too.

But if you fancy a bit of risk, you could open your share-dealing account or buy an index-tracker.