Why it's still worth saving


Updated on 03 July 2009 | 4 Comments

Paltry interest rates may put you off saving. But according to one survey, we're putting away more cash than ever. Here's why you should join the savings bandwagon...

There hasn't been much for savers to shout about recently. With the base rate at 0.5%, and savings on a downhill slide, if you haven't fixed your savings rate already, many of you will be holding out for when rates pick up again.

But despite these lacklustre rates, according to National Savings and Investments (NS&I), people are actually putting more money aside than they were three months ago.

NS&I's Quarterly Savings Survey, which has run for nearly five years, shows Brits are now squirreling away £92.41 each month, up from £90.12 a month last winter. Those who regularly save are also putting away the largest amounts since the survey began.

Intentions to save are also growing, and we now want to squirrel at least £219.11 away per month, compared to £210.26 last quarter.

Worthy returns?

But with savings rates so low, you may not think it's worth opening a new savings account. After all, interest rates are nowhere near as attractive as they were a year ago.

However, on closer inspection, the recent volatility in the money markets is prompting providers to turn once again to their savings books to fund lending, and a number of providers have increased their rates in order to generate more cash.

Earlier this month, Sainsbury's increased the rate on its Internet Saver from 2.6% to 2.8% AER (providing you have £1,000 or more to save), and Egg recently upped its savings account rate from 2.5% to 2.8% AER, although this rate is only available to new customers.

An even bigger indicator that things are looking up is the interest rate of Investec's High 5 account. This rate is based on the average of the top five rates published by Moneyfacts each week, and recently went up from 3.03% to 3.10%.

New kids on the block

And, it's not just these providers who are raising their game.

Not so long ago, the best instant access interest rate you could get was 2.75% AER. But Serena Cowdy's recent round-up of the best savings accounts showed that rates of over 3% are now available.

The Birmingham Midshires Telephone Extra account currently pays 3.15% AER, though this rate includes an introductory bonus of 2.65% hich guaranteees a minimum return for 12 months. meanwhile, the new Alliance & Leicester Online Saver Issue 5 also pays a rate of 3.15% but with a variable bonus of 1.65% to 2.65% depending on your balance.

These hefty bonuses are a sign of the times which means the interest rate you'll get after this period will drop significantly.

So if you open an account with a big bonus, make sure you set a reminder in your diary to get a new account before it expires.

Real rates

With savings rates creeping up, it's also worth remembering that inflation is slowing down, and in some cases, deflation has taken hold.

The Retail Prices Index (one measure of inflation) currently stands at -1.1%, which means prices are 1.1% lower than they were a year ago.

As a result, the 'real returns' on your savings are going up, and your money is actually worth more than this time last year - yet another reason why you should continue to save.

Get into the habit

So, with the savings outlook starting to look more positive, if you're one of the many savers who puts some money from your salary aside each month, one of the best places to stash your cash is a regular saver.

The interest rates offered on these accounts are much juicer than standard accounts, with the current market leader, the Barclays Monthly savings account paying a juicy 6% AER on deposits from £20 to £250 per month, over a one year term.

You don't need a Barclays current account to qualify, and you can make withdrawals from the account whenever you like, although you'll earn a lower rate of interest of 3.03% in any month when a withdrawal is made.

If you think you may need access to your money while you save, you may want to consider the Monthly Saver account from Lloyds TSB.

The account pays a lesser rate of 5% AER on deposits from £25 to £250 a month. However, there are no interest rate penalties if you make a withdrawal. The only downside is you need to have a Lloyds TSB account to open one.

Jane Baker takes a more extensive look at regular savings accounts in Earn 6% and more on your monthly savings.

Start budgeting!

Finally, if you're looking for ways to save more each month, you could start a spending diary, which will show you exactly where your money is going, or use a budgeting tool, which does all the calculations for you.

The results are always interesting (sometimes even scary), but having a breakdown of all your weekly shopping habits will help you identify the areas you can afford to cut down on. Just remember to be realistic in what you cut, as one slip-up can quickly lead to several.

The savings you'll make will soon add up, and if savings rates continue to rise, you should be able to save more of that hard earned cash, while earning more interest on your savings too.

More: Savings rates are finally rising / Avoid these scandalous savings accounts!

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