Seven questions savers should ask
Determined to begin saving but unsure of where to start? Here are the key questions you should consider before stashing your spare cash
Friday 31 July 2009
Since the credit crunch, many people have come to realise the importance of having an emergency fund in place - and with interest rates finally on the rise, now could be the perfect time to start saving.
Here are seven questions novice savers should consider before they begin putting money aside.
1. Should I be saving right now?
Right now, the economic outlook is uncertain and unemployment is at its highest level for more than 10 years.
Yet, according to recent research by Scottish Widows, a worrying 30 million British people do not have a safety net in place to protect them in the event their main income is lost.
In troubled times like these, the importance of having savings or an insurance policy such as income protection insurance becomes clear.
The good news is that, now the Bank of England base rate has stabilised, savings providers have begun competing more strongly for savers’ deposits, driving rates upwards.
2. How much can I afford to save?
If your budget is already stretched, there are simple things you can do to free up extra cash.
For example, if you have never switched your energy supplier or haven’t done so recently, you could save hundreds of pounds on gas and electricity this year.
Similarly, you could cut the cost of insurance policies such as car and home contents cover, which may allow you to put more money aside.
The key is to only save a sum you can genuinely afford. It is far better to save little and often then never and not at all.
3. Have I used my tax free ISA allowance?
The first sensible place to store your savings is in a tax free ISA (Individual Savings Account).
Usually, a basic rate tax payer will lose 20 per cent of the interest earned on their savings to HM Revenue and Customs, while higher rate payers have to hand over a huge 40 per cent.
However, if you are a UK citizen and over 16, you can save up to £3,600 in a cash ISA each tax year and receive 100 per cent of the interest you earn on your money.
From October, anyone aged 50 or over will be able to save up to £5,100 in a cash ISA this tax year.
4. Where are the best rates?
Right now, fixed rate bonds are offering some of the most attractive savings rates on the market. If you can afford to lock a lump sum for up to five years, you could earn in excess of 5 per cent on your investment - 10 times the Bank of England base rate.
Meanwhile, the market’s best buy easy access accounts are offering rates of around 3 per cent AER on initial deposits of as little as £1.
5. Do I need to access my cash?
With the economic outlook so uncertain and job security increasingly rare, many people will want their emergency savings pots to be easily accessible.
If you know you may need to get hold of any money you save in the near future, it’s a good idea to opt for an easy access or instant access savings account. Unlike fixed rate bonds, these accounts typically allow savers to withdraw money at very short notice and do not apply penalty charges for the privilege.
6. Should I save if I’m in debt?
Mathematically speaking, it makes sense to pay off your debts before you start to save. This is because the interest you pay on your debts is likely to outweigh the amount you earn on your savings.
However, nothing is black and white. Some people prefer to have savings set aside in case disaster strikes.
It is therefore up to the individual to decide whether they would rather put all of their spare money towards debt repayments, or keep some back to create a cash cushion for emergencies.
7. Are my savings safe?
In the UK, the Financial Services Compensation Scheme (FSCS) will protect up to £50,000 per individual, per financial institution.
This means that if your bank were to experience severe financial difficulties, the first £50,000 of your savings would be guaranteed by the government.
However, it is important to be aware that some banks are linked to one another, share their FSA registration and therefore count as a single financial institution under the FSCS - even though this may not be obvious to their customers.
If you save with a bank that is not UK owned, your money may be protected under another country’s savings guarantee scheme. Always check who is responsible for your savings and how you would be compensated in the event your provider became insolvent.
Victoria Bischoff is a personal finance writer at BeatThatQuote.com
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