Introduction to saving

BUDGETING ESSENTIALS

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Introduction 1. Understanding interest rates 2. The different ways you can save

People save money for different things. Some may be saving for a holiday, a washing machine or a new car. Others save for their future – maybe for retirement. It’s good to have some money saved for emergencies, too.

In this lesson, we’ll look at different ways to save. You’ll learn about interest rates and what the different types of savings accounts do.

KEY LEARNINGS

 
  • What interest rates are and how they work
  • The different types of savings accounts 

Read time:

6 mins

Chapter 1 - Understanding interest rates

Chapter 1

Understanding interest rates

Read time:

1 min

What is interest?

When you start to save, you're putting some money aside,  for later. Depending on where you put your money, you may get some extra after a while. This extra money is what we call interest.

As you start to look at different savings accounts, you'll see the interest rate for each one. This is how much interest you're likely to get if you put your money into that account. It's shown as a percentage. 

This is how it works:

When you save into an account, you'll earn interest.

This is money paid into your account by your bank or building society for saving your money with them.

For example, if you put £1,000 into a savings account that earns 2% interest every year, you'll earn £20 in interest.

This would give you £1,020 after one year.

The interest you earn could be different if the rate of interest changes or your savings account balance changes, during the period that the interest is calculated.

The Bank of England (BoE) sets an official borrowing rate for the UK, which is called the base rate (or bank rate).

This affects the interest that you earn on your savings.

If you're a UK taxpayer, you'll probably have to pay Income Tax on the interest you earn on your savings.

Most UK adults have a personal savings allowance.

This lets them earn up to £1,000 interest on their savings without paying tax if they're a basic rate taxpayer. Higher rate taxpayers can earn £500 interest tax free.

Remember

Interest is the money you earn from the savings you have in your account.

Introduction - Introduction to saving
Chapter 2 - The different ways you can save

Chapter 2

The different ways you can save

Read time:

5 mins

What are the different types of accounts?

There are many ways and places to save your money. All of them have benefits and drawbacks, so it's important to know exactly what these are when you start saving.

Select each option to find out more.

  • Jam jarring is a type of bank account that lets you split money from the same account into different 'jars'. This helps to keep money for bills aside so you can budget the rest of your money without worrying.

    The money can be set aside for things other than bills – a holiday or house deposit, for example.

     

  • The term ISA stands for 'individual savings account'. Cash ISAs allow you to save tax-free (up to £20,000) in a cash savings or investment account.

    ISA accounts are offered by banks, building societies, insurers, asset managers and a company called National Savings and Investments (NS&I).

     

  • Easy-access savings accounts allow you to take money out of your account quickly and easily. 

    Easy-access accounts may also limit the number of withdrawals you can make each year without losing interest, so remember to check. 

     

  • Instead of having quick access to your money, saving it in a notice account means you’ll have to tell your provider in advance that you want to make a withdrawal. In return, you're likely to get more interest than you would from easy-access savings accounts. 

    Some notice accounts need you to let them know you intend to withdraw money 30, 60 or 90 days ahead. These accounts may not suit you if you need to access your savings unexpectedly. If you do make an emergency withdrawal from a notice savings account, you're likely to lose some interest.

     

  • Regular savings accounts or 'regular savers' require customers to deposit money each month, without fail – so they are ideal for savers who are just starting out, or who wish to slowly add cash into their account regularly.

     

Other types of savings

 

  • Fixed-rate bonds are savings accounts that offer a fixed interest rate on your cash for a set period of time. These accounts usually offer higher interest rates than easy-access accounts, but your money will be tied up for a set length of time, known as the term. 

    Fixed-rate bonds can extend over one year, two years – even three, four or five years. Generally, the longer you're prepared to lock your cash away for, the more interest you'll receive. While you may be able to get your money out of a fixed-rate bond in an emergency, you're likely to pay a penalty for this. So, putting your cash in a fixed-rate bond is only a good idea if you're sure you won't need that money for a few years.

  • Help to Save accounts offer a bonus payment from the government of up to 50% on savings paid into the account. 

    You can open this account if any of the following apply:

    • You get Working Tax Credit
    • You're entitled to Working Tax Credit and get Child Tax Credit
    • You're claiming Universal Credit and you earned £617.73 or more from paid work in your last monthly assessment period

    You also need to be living in the UK. If you live overseas, you can apply for an account if you’re either a:

    • Crown servant or their spouse or civil partner
    • Member of the British armed forces or their spouse or civil partner

    You can save into the account for four years. You'll get a bonus payment of up to 50% on your savings after two and four years. If you close your account, you won’t be able to reopen it or open a new one. 

  • In credit unions, members pool their savings and lend to one another. Members have something in common, such as the same employer, trade union, attending a specific place of worship or living in the same area. Credit unions are not-for-profit organisations that use the money they earn to offer financial services like savings and loans, for the benefit of their members. 

    This might be right for you if you like the idea of saving with an organisation owned by and run for the members that use its services, and if you've had difficulty opening an account with a bank or building society. 

  • Sharia-compliant savings accounts provide the same day-to-day banking services as mainstream current accounts. But they don't give you a return on your money or offer overdraft facilities as the principle of paying or charging interest is against Islamic law. Any money invested will be kept separate from other bank accounts – it won't be used to generate interest or be invested in banned businesses. 

    This will be for you if you want to bank according to Islamic law and want to grow your savings through Sharia-compliant profits and not interest. It will also ensure that your money is not used for lending to businesses that provide alcohol, tobacco or gambling.

 

Be kind to your mind

As you can see, there are so many ways to save it's easy to become overwhelmed by this.

Take your time to understand it fully and, if you have a bank account, don't be afraid to ask your bank for help.

Introduction to saving: completed!

In this lesson, you've explored how you could start to save. You've looked at interest rates and how they work. You've also seen the different types of savings account options there are, to help you work out which ones might meet your needs.

Chapter 1 - Understanding interest rates

Exit lesson and mark as complete

 

Lloyds Bank Academy is committed to providing information in a way that is accessible and useful for our users. This information, however, is not in any way intended to amount to authority or advice on which reliance should be placed. You should seek professional advice as appropriate and required. Any sites, products or services named in this module are just examples of what's available. Lloyds Bank does not endorse the services they provide. The information in this module was last updated on 29th October 2024.

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