Monthly Savings Account Guide

A monthly savings account is a great way to put money to one side, whether you’re saving for a house, a holiday, retirement, or a rainy day. There’s never a wrong time to start saving. Even if having a monthly savings account is entirely new to you, it’s never too late to start.

Of course, with so many different types of savings accounts available, you might need some help understanding the best place to put your money. In this guide, we’ll share everything you need to know about monthly savings accounts.

Why save money? 

It may seem like a silly question, but why is it important to save money? As we touched on above, there can be many different reasons, from having a fund for emergencies to saving up for a specific reason like a house purchase. Still, any money you put to one side today can become helpful in the future.

Simply put, if you spend every penny you earn each month, you’ll have no safety net if something unexpected happens in the short-term. You never know when you’ll need some extra money, so it’s a good idea to set something aside for the future. 

Saving is also essential for most people to afford big purchases, like buying a home, renovating, or going on holiday. It’s easiest to save if you have a good amount of disposable income available at the end of each month. However, even if this is not the case for you, it can still be worthwhile and very sensible to put some money aside as a precaution. 

Savings accounts

While you could put money in a jar or under your mattress, savings accounts exist to offer security and protection. They can also stop you from dipping into your cash while also giving you the chance to make interest and grow your savings.    

Before you start saving

So you’ve decided to open a monthly savings account? As a first step, it’s a good idea to take a look at your financial circumstances. In particular, whether you have any debts. If you do, it might be better to use any extra cash to pay those off before you start saving. The interest on debts is usually more than the interest you can earn on savings, so you’ll also be better off financially if you pay your debts off first.

The next question to ask yourself is whether you want to open a monthly savings account or invest your money instead.  

What’s the difference between saving and investing? 

It’s helpful to know the difference between saving and investing when you’re looking for the best way to save money and grow your funds over time.

  1. Saving

On a basic level, this is when you put money into a savings account. It’s kept safe and protected by the provider, and you get it back with interest.

2. Investing

This involves investing your money in something, for example, on the stock market, in a property or a business, or valuable items which typically increase in worth, like art, antiques, or wine. You might do this in the hope of making more money than you put in. 

The risk with investing is that you could lose money. There are a few guarantees, so it’s more of an educated gamble. What does this have to do with savings? Some savings accounts, such as stocks and shares ISAs and innovative finance ISAs, are directly influenced by the stock market.

The best option for you will depend on your individual circumstances. Investing can seem attractive if you have disposable income and existing knowledge of the market you’d like to invest in. For example, if you’re a property guru or a financial whiz, this could reduce the potential risk of losing money. However, if you’re more risk-averse and just want to protect your savings and grow them slowly, then a savings account might be a better fit.

What is a monthly savings account?

Unlike your current account, a savings account is for depositing money you’ll leave to gain interest over time. You won’t usually access a savings account every day in the way you would your current account. In fact, some savings accounts are designed to restrict your access to your money and reward you with benefits such as a fixed interest rate for a set period. 

Other accounts come with easy access, allowing you to withdraw money whenever you want, but might have a less rewarding interest rate. Monthly savings accounts calculate the interest you make monthly. In contrast, others calculate interest on a quarterly or annual basis. The right savings account for you depends on your financial situation and your savings goals. 

How to open a monthly savings account

Most monthly savings accounts can be opened online, over the phone, or in-branch. You may even be able to set up a savings account through your existing banking provider using their mobile banking app. Usually, you’ll need to show some proof of identity and address. You may need to make a deposit into the account to officially open it.

What types of monthly savings accounts are there?

As you might expect, there are many different monthly savings accounts to choose from. Not to mention an equally wide range of providers, including high street banks, building societies, and more. Fixed-rate bonds, cash ISAs, regular and bonus savings accounts all offer different features and benefits. Interest is also paid with different frequencies, monthly, quarterly, and annually, depending on the type of account. We’re interested in monthly savings accounts in this guide.

If you’re new to the world of savings, the different terms may seem confusing. What is an ISA anyway? And what are the differences between lifetime ISAs, fixed-rate cash ISAs, and easy access cash ISAs? While the terminology may sound complicated at first, savings accounts are actually a lot more straightforward than they seem. Let’s take a look at the monthly savings accounts you might be able to open and the key differences. 

What is an ISA?

An ISA – or individual savings account – is a savings account with tax-free returns. Every tax year, you have an ISA allowance. In other words, a certain amount of money which you can put into your ISAs every year.

The interest you gain from your ISAs will never be taxed. Suppose you’re able to set aside this money every year. In that case, you could eventually generate a large amount of tax-free income from your ISAs. To open an ISA, you need to be 16 or older (or 18 for a stocks and shares ISA), be a UK resident, and have a national insurance number. 

ISAs are only for individuals – you can’t have a shared ISA or an ISA in joint names.

What types of ISA are there?

1. Cash ISAs

Most cash ISAs will offer you a fixed-term interest rate between 1 and 5 years with limitations on how and when you can withdraw funds. If you do, you could be penalised. However, there are easy access ISAs as an alternative.

2. Stocks and shares ISAs

These accounts actively invest your money in stocks and shares. You can choose where to invest for yourself or leave it to the fund manager. Your return is directly linked to the investment’s success, so you could earn a lot more than a cash ISA, or you could lose money.

3. Specialist ISAs

These include Lifetime ISAs (LISAs), which are for first-time buyers aged 18 to 39. LISAs allow you to save £4,000 per tax year, and the state will add a 25% bonus on top – that’s £1,000 if you can deposit the full £4,000. Others include a Junior ISA, which locks cash away for children until they turn 18, and Innovative Finance ISAs.

What are the best accounts for saving money? 

When it comes to saving the most money, what are the best monthly savings accounts? We’ve already mentioned ISAs, but there are lots of other options too. Different versions have different rules for how much you can save and when. So you should maximise your interest by depositing your savings into the best-paying option available at the time.

Remember, when choosing the best savings account, looking for the best option to suit you is the most important thing. It’s about finding the monthly savings account that best fits your needs.

1. Monthly interest savings accounts

A monthly interest savings account pays you interest monthly, based on your balance. This can include fixed-rate, easy-access, and regular savings accounts.

2. Fixed-rate savings accounts

Also known as fixed-rate bonds, these accounts offer a guaranteed interest rate for an agreed period. Typically, the longer the fixed term, the higher the interest rate provided. Fixed-rate accounts usually have a minimum deposit and some other conditions. If you have a good amount of savings to deposit and won’t need to access them for a while, this could suit you.

3. Easy-access accounts

These accounts offer lower interest rates, which means you’ll make less money. Still, you can usually withdraw money whenever you like. Always check the terms and conditions. Some instant-access accounts can have an upper limit on withdrawals.   

4. Regular monthly savings accounts

Regular savings accounts can offer higher interest rates for a fixed period. They usually stipulate that you deposit a minimum amount – £250, for example – every month. However, if you fail to make the monthly payment on time or withdraw funds, you could lose the preferential interest rate.

These accounts are great for reaping competitive rates over a fixed period. Still, once the term is over, it’s worth shopping around to find the best home for your savings. Otherwise, your money will almost always revert to your bank’s ordinary savings account rate, which is often close to 0%.

Are my savings protected? 

The majority of UK banks and building societies operate under Financial Conduct Authority (FCA) regulations. These institutions protect up to £85,000 of your savings, thanks to the Financial Service Compensation Scheme (FSCS).

The one loophole to watch out for is when individual institutions, such as HSBC, own several banking brands. You only get the £85,000 protection per institution, not brand. So if you have £50,000 in First Direct and £50,000 in HSBC, you’d only be protected for the first £85,000. To get the most protection, split your savings across a few banking institutions, especially if you have more than £85,000 to protect.

It is also worth remembering that the FSCS only protects banks. If you save with a peer-to-peer investment firm, you won’t get any statutory protection. You may get some redress from an in-house protection scheme, but it’s discretionary and less reliable than FSCS protection.

How much savings should I have by age 30 in the UK? 

It’s natural to compare your life to others, particularly at critical milestones, like reaching the age of 30. How much money should you have in savings by that age if you live in the UK? There’s no one figure. This will vary depending on your individual circumstances and background. 

Of course, if you’re interested in getting an idea of the average savings of a 30-year-old in the UK, then there are statistics available. A recent survey by Equity Release Supermarket suggests that by the age of 30, UK citizens have an average of £10,326 in savings. However, it’s worth noting that this is just one particular survey and doesn’t represent everyone – so don’t worry if you haven’t saved that much.

Monthly savings advice

We’ve gathered together some tips for monthly savings accounts.

  • In a relationship? Put your combined savings in the name of the lower-rate taxpayer

  • There are special savings accounts for children, with 3%+ interest, and Junior ISAs, which lock cash away until the child turns 18

  • If you have any debts, pay these off before starting a monthly savings account

  • You can transfer an old ISA into a new better paying ISA; just remember never to withdraw the money as cash

  • Many monthly savings accounts have a minimum deposit amount, which can be as high as £1,000 or as low as £1, so make sure you’re aware of this before signing up

  • Watch out for any penalties associated with not making your minimum payment or withdrawing funds early

  • Look out for monthly savings that restrict the number of withdrawals you can make – this is fine if you do not need regular access, but be careful not to get caught out

  • If you’re on an introductory rate or bonus offer, set an alert for when this ends, so you can potentially move your savings elsewhere   

Saving money is a great way to safeguard your present, invest in your future, and afford the currently unaffordable. Still, with so many different accounts available, choosing the right one can feel like a challenge. Use this monthly savings account guide and our savings accounts FAQ to figure out the best way to make the most of your savings.

6 May 2021