What to do if you need flexibility with your savings?

by Adam on February 22, 2013

 

flexibility in savingsWhen it comes to saving money it makes a lot of sense to seperate your money into different buckets.

One of the first tips I ever give when someone asks me to help them save money is make sure they have opened a seperate savings account, away from their other accounts. The separation is important because it helps psychologically detach yourself from money that is to be spent soon and money that is to spent far in the future.

Both a savings account and a term deposit account are easy to set up and manage or monitor online, and both are great, fee free, ways to earn interest on your savings and investments.

However, which is best for you – an easy access  savings account, or a term deposit account? To help you decide here are a few pros and cons of each financial product, so you can learn more about the features and benefits of both options and choose one which best suits your particular needs, and your individual savings goals.

 

Easy Access Savings Account

An easy access savings accounts from Birmingham Midshires or elsewhere could be a brilliant way to separate your savings away from your everyday transaction account and earn you a certain rate of interest above the base rate. Easy access savings account providers can also often offer promotional or introductory rates to give your savings a boost from the start.

Pros of a savings account:

  • A easy access savings account is an easy to use, flexible and at call account. When you choose the best savings account for your needs, you will have an account which lets you make unlimited deposits and withdrawals without penalty, and one which allows you to boost your savings with an extra deposit, or withdraw funds in an emergency. The funds in your savings account are not only earning a high rate of interest, but they also remain at call which means you can access them through online banking if you reach your savings goal sooner than expected or change your focus, or if you need to cover an unexpected expense.
  • Your savings account will help you set up and stick to a regular savings plan. When you open a high interest savings account you can enter your savings target and the deadline for you to meet that goal. Your savings account will then track your progress and give you regular updates – sometimes even by SMS or email if you choose – to show you just how far you’ve come, and how close you are to reaching your goal. You can also set up automatic online transfers from your transaction account to your savings account to keep your savings regularly growing.

Cons of a savings account:

  • Instant or almost instant access to your savings can increase temptation to spend. As your savings account funds are at call, you can instantly transfer them to your transaction account and they will arrive immediately if the account is with the same provider, and in a matter of days if you’re not. Therefore, if you think that this would be too much temptation to spend your savings on frivolous items, or before you reached your goal, then perhaps a high interest savings account is not for you.
  • Your interest rate can be flexible. The interest rate offered on savings accounts is high at the moment and going up because the official base rate is also on the rise. However, the interest earned on your easy access savings account is the bank’s standard variable rate and is subject to change at any time. Therefore, if you have a long term savings goal or are looking for the security of a high interest long term investment, you may prefer the guaranteed returns of a term deposit.

Term Deposit Accounts

A term deposit account is not the inflexible, high stakes investment which many people see it to be. A term deposit account can be opened for a term of between one month and five years in most cases and you often don’t need a minimum deposit either.

Pros of a term deposit:

  • You have the choice of flexible terms and a range of payment and reinvestment options. Most term deposit accounts will not require a minimum investment to open the account and you can choose a term which best suits you – anywhere from one month to five years. You can also choose how your interest returns are paid for investments over 12 months and can have monthly, quarterly, six monthly or yearly returns paid to you as income. You’ll also have a range of reinvestment options offered to you before your term expires so you can ensure your savings continue to grow.
  • The interest rate you will earn is guaranteed for the entire term of the investment. From the moment you choose your initial investment, the term of the deposit and the frequency of interest payments you will know the interest rate your investment will earn. That interest rate is then guaranteed for the life of your investment and will not change, not matter what else happens in the market.

Cons of a term deposit:

  • To access your funds early penalties apply. A term deposit account may not be the right option for you if you don’t have an emergency fund, or you think you may need to access your investment early. A term deposit is able to offer you such high guaranteed rates because your funds are locked away for a determined period. Therefore, if you need to access your funds early you will be charged early exit fees, or you will earn a reduced rate of interest on your investment.
  • The best returns are on long term, high value investments. If you have a significant investment to make in a term deposit account and can afford to leave it for the longest term then you can make substantial returns. However, for smaller, short term investments a term deposit is not always the best option and you need to shop around for the best interest rate for your term and investment amount. For example, if you are looking at a term deposit for six months and the interest rate is advertised at 6.00% you will really only be earning 3.00% interest because the advertised rate is a per annum rate and you are only investing for half the year.

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{ 1 comment… read it below or add one }

Jeremiah

Awesome stuff. Thanks for taking the time to lay every thing out like this. I blog about money management as well, and so I appreciate the effort you put into your blog. Saving is such an important part of planning for financial freedom.

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