For many people who have any kind of disposable income, saving some of that money each month is important. Whether it’s for a specific purpose or just for a general feeling of security, it’s common practice for people to make a savings plan so they can make the most of their income and be ready should they need some extra cash unexpectedly. As people progress through life it’s often the case that their outgoings increase at certain points – for example when they have children or buy a house.
The point where some people go wrong is failing to realise that the way they save could make a huge difference to how much money they’ll end up with long term. Making an informed choice about the kind of bank account to open will ensure your money works really hard for you. Putting money aside is great, but if you’re not taking advantage of the ways you can earn even more money through interest then you could be missing out on a lot of extra cash over the years.
If you’re not interested in investments, but just want to find the most efficient way to put some money aside each month, your decision will likely revolve around whether you’d be better off with a standard savings account or taking out a cash ISA.
The difference is that cash ISAs, introduced by the UK Government in 1999, are exempt from tax – so everything you save accrues interest without the taxman getting a slice of your profits. Up to 5th April 2014 you were able to deposit a total of £5,760, after which the limit increased to £5,940; but if you withdraw money from the account you can’t replace it within the same tax year. It’s important to note that this means £5,940 is the total amount you can put in the account per tax year, not the maximum balance you can have in the account at any one time.
For example, if you deposit the full £5,940 at the beginning of the year and then withdraw £1,000, you can’t replace that money until the next tax year. Or alternatively, if you start the year by putting £3,000 in the account, you can add £2,940 over the course of the year – but if you withdraw some money during the year, the total you’re allowed to deposit before the next tax year starts is still £2,940.
So how do you know whether you’ll be better off with an ISA or a standard monthly savings account? The answer lies in why you are saving and how regularly you want to have access to your savings. An ISA will be most effective if you deposit the full amount and then don’t touch it until the next opportunity to add funds. This will allow your money to accrue the maximum possible amount of interest each year. For example, on the Barclays savings page here you can see the current interest rates they offer on a cash ISA.
ISAs are really well suited to savings you plan to keep for a long time. If you’re saving for something like a house, sending your children to university or even towards your retirement, you won’t need to dip into the savings and will get the most from your money by using a tax exempt savings account.
On the flip side, if you are saving towards shorter term goals like holidays, car repairs or rainy days you may need to withdraw funds more regularly, and choosing a savings account with a good interest rate will be your best bet.
Whether you go for a cash ISA or a standard savings account, it’s always important to shop around for the best savings rates and move your savings around annually as better deals are made available.
Please use this article for information purposes only. It is always advisable to speak a personal finance expert when making financial decisions. Links contained in this piece are for the purposes of information and further research and should not be taken as an endorsement of third party sites.
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