Is it beneficial to regularly save money in standard savings accounts?
Scolling Through Savings Accounts? 🤔
If you're on the hunt for the best savings accounts, remember that the high-interest ones are usually regular savings accounts. For instance, First Direct and The Co-op Bank offer 7% regular savings accounts. Many banks and cooperatives have rates of 6% or higher. Nationwide, which previously had an attractive 8%, now offers 6.5%.
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These rates surpass those on easy-access accounts and fixed-rate bonds, where the top deals pay less than 5%. A regular saver account appears to be a no-brainer, right? But here's the catch: regular savings accounts restrain the amount you can contribute each month and discourage large upfront deposits.
Account
The advertised interest rate applies solely to the initial deposit during the first month. Let's say you save £200 a month in the 7% First Direct account. While you earn 7% interest on the first monthly deposit of £200, you won't get 7% on the £2,400 you save across the year. The actual interest earned is roughly half the headline rate.
Interest rate
Sarah Coles, head of personal finance at Hargreaves Lansdown, remarks on our website: "The headline rate on a regular saver looks great, but recall the impact of trickling funds in. Accounts like these usually last for a year, and while the first £200 is held for a year, the last £200 is only in there for a month. It means you're essentially getting half the advertised rate on average."
Interest earned on £3,600
🔍How interest rates work on a regular savings account? 🔍
A closer squint at how much interest you'll earn on a regular savings account:
First Direct Regular Saver
The current top regular savings account, run by Principality Building Society, pays 7.5%, but only for six months, and you can contribute up to £200 a month. For a more traditional comparison, let's consider the First Direct 7% regular saver, lasting a year and permitting up to £300 to be saved each month.
7%
If you deposit £300 a month into the First Direct account, it gives a total of £3,600 over the year. Many savers may expect to earn 7% interest on the full £3,600 at the end of the year, resulting in £252 in interest.
£139.46
However, the advertised rate only applies to the cash saved for a full year—i.e., the initial deposit during the first month. The second £300 saves for 11 months, earning eleven-twelfths of 7%. Continuing this trend, the subsequent £300 receives ten-twelfths, and so on. According to MoneyFacts, a regular savings account paying 7% with £300 deposited monthly generates £139.46 in interest, equivalent to an interest rate of 3.87%.
Explore MoneyFacts' monthly deposit calculator for more regular savings account examples.
Atom Bank easy-access
💡Regular Savings Accounts vs Other Types of Savings Accounts? 💡
4.65%
Given the monthly deposit and overall interest rate restrictions, are regular savings accounts the best deal? Let's say you want to save £3,600. Should you drip-feed this into a regular saver, or invest a lump sum in an easy-access account or one-year fixed bond?
£167.40
| | | || --- | --- | --- || Account | Interest rate | Interest earned on £3,600 || First Direct Regular Saver | 7% | £139.46 || Atom Bank easy-access | 4.65% | £167.40 || Cynergy Bank one-year fixed bond | 4.65% | £167.40 |
As you can see from the table, the best easy-access account and one-year fixed-rate bonds both pay 4.65%, earning £167.40 interest on a £3,600 deposit—a higher amount than that generated by the First Direct account.
Cynergy Bank one-year fixed bond
If you don't want to lock your money for a year and need flexibility, the Atom Bank easy-access account may be the best option. If you don't need access and believe the Bank of England base rate will fall this year, leading to savings providers reducing their rates, the one-year fixed-rate bond could be a wiser choice.
4.65%
Coles states that regular savings accounts may be useful for nurturing the savings habit, but those who have a lump sum to save at the outset might do better elsewhere.
£167.40
🎯Is a regular savings account the optimal choice for you? 🎯
According to Rachel Springall, finance expert at MoneyFacts compare.co.uk, regular savings accounts are ideal for slowly building a pot as they encourage the savings habit.
However, she warns, "Consumers will need to verify if these accounts are suitable for them, as some can be restrictive and might not cater to larger deposits. Regular savings accounts also revert to flexible accounts after the term ends, which might not pay a good rate. This means savers must take note to reinvest if they are still working towards their financial goal." 🚀
Springall highlights that a fixed-rate bond is ideal for someone who has a substantial lump sum to invest, desires a guaranteed return, and doesn't want the temptation of using the pot during the short term. "Those who change their mind can get their money back if it's within the cancellation agreement of any bond, so it's advisable to be aware of any terms and conditions before investing."
In contrast, an easy-access account might be a more suitable alternative if you value flexibility with your deposits. Springall adds, "However, some providers may put a limit on the amount someone can withdraw during the year, and others can carry a rate bonus. Comparing deals carefully and making a calendar note of any bonus is crucial to avoid disappointment."
Our easy-access savings vs regular savings article offers a more detailed exploration of these options to help you determine which account is right for you. 🔎🔥💪💪🔥🔎
- In personal finance, regular savings accounts can be beneficial for fostering a savings habit due to their high-interest rates, such as those offered by First Direct and The Co-op Bank. However, these accounts have deposit limits and may not provide the full advertised rate for the entire savings amount.
- Comparatively, easy-access accounts and one-year fixed-rate bonds, like those from Atom Bank and Cynergy Bank, offer higher interest rates than regular savings accounts for larger deposits, providing a potential alternative for those with a lump sum to save.
- Ultimately, the choice between a regular savings account and other types of savings accounts depends on an individual's personal situation, saving goals, and risk tolerance. Careful comparison and understanding of account terms and conditions can help ensure the optimal choice for saving efforts.
