Two Of The Seven Best Ways To Save Money

Savings and ISAs

20 December 2007 | 0 Comments

In part three of our Foolish GCSE, read about the two types of 'savings vehicle' that are the best way for most people to save.

This is the third part of my personal finance GCSE to give you a well-rounded basic education in money matters. The first two parts looked at: 1. How to get out of debt: The Motley Fool's Personal Finance GCSE! 2. How to get into debt: A Complete Guide To Borrowing Money Now we move on to savings. There are dozens of ways to save, including under the mattress, Farepak-type schemes(!), piggy-banks and offshore accounts. But most ways (including all those examples, by the way) aren't suitable for the majority of savers. Some ways aren't suitable for anyone at all! In fact, there are seven key options to focus on. Of those seven, two are decidedly the most Foolish (i.e. the best) for virtually everyone. To make this easier, let's use the correct terminology: each option is called, strangely, a 'vehicle'. A Foolish savings vehicle pays a decent interest rate, it has a good guarantee, and it's flexible. You want a good guarantee so that you don't have to switch every five minutes. But you want flexibility so that you can both withdraw money quickly and without penalty should your circumstances change, and so that you can take advantage of better rates if an even better product crops up, which often happens. A decent interest rate speaks for itself. Let's get to the nub of it then: the two most Foolish savings vehicles are cash ISAs and easy-access savings accounts. 1. Cash ISAs Cash ISAs are tax-free savings accounts. Compare them with 'normal' savings accounts, where you lose 20% to 40% of the interest you earn in tax (depending on whether you're a basic-rate or higher-rate payer). You can put up to £3,000 in a cash ISA each financial year (which is 6 April to 5 April the following year). From next April you'll be able to put in £3,600pa. Some cash ISAs require you to put in a lump sum, others let you put money in regularly each month, and some let you put money in whenever you want. The best cash ISAs tend to have roughly the same interest rates as the top easy-access savings accounts but, since tax isn't deducted, you earn more interest. Terms and conditions vary for cash ISAs. Look for ISAs with long guarantees on the interest rate. (Any guarantee promising to pay the Bank of England Base Rate or higher for at least a year is good at present.) Also, look for ISAs where you can withdraw your cash quickly should you need it. The good news for those of you just completing your GCSEs is that many cash ISAs are available for 16-year-olds. 2. Easy-access savings accounts When you've used up your ISA allowance, a typical Fool's next best place to save excess cash is an easy-access savings account, which grants you access to your savings within weeks, days or sometimes instantly. This vehicle is also called a 'no-notice account'. With these accounts you can put money in and take it out whenever you want. Just like cash ISAs, search for the account with the highest interest rate that also has a decent guarantee. Also, make sure there are no penalties for withdrawing cash, e.g. losing a month's interest. Your bank will automatically deduct 20% from the interest you earn as income tax. If you're not a taxpayer, you can fill in form R85 from HM Revenue & Customs, which will tell your bank not to deduct tax. If you're a higher-rate taxpayer, you'll have to declare the interest you've received on your Self Assessment, so that the taxman can collect an additional 20%. There are alternatives to cash ISAs and easy-access accounts. In the next part of this personal finance course, I'll talk about the five best remaining options. Extra reading Saving is an endeavour for those with no debts, as I explained in the first part of this GCSE. However, should we have an emergency savings pot even if we have debts? Read about the pros and cons in Should You Save Or Pay Off Debt? and When Saving While In Debt Is A Good Idea. > Compare savings accounts through The Fool.

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