Why save?

There are many good reasons why it makes sense to save. It may be that you want to have some money put aside 'just in case', or maybe you are aiming to save up to buy something special, like perhaps a holiday, a deposit for a first home or that 'must have' gadget.

As well as providing a safe home for your money, savings accounts also earn interest so provide you with an opportunity to grow your money. The difference between savings accounts and day to day 'current' accounts is that savings account usually have fewer services attached to them - for example you don't get a cheque book or a debit card that allows you to make payments from the savings account but some savings accounts do provide you with a card to allow you to draw cash from a cash machine.

How much can I afford to save?

Click here to use our budget calculator to help you work out how much you can afford to save.

What's the best option for me?

When deciding what type of savings account is best for you may want to consider the following:

• How quickly will you need to get hold of your money? If the answer is as quickly as possible avoid an account where you need to give notice to make withdrawals or where withdrawals are not allowed.
• How much flexibility do you need?  You may want to pay in whenever you have spare cash available in which case you need to make sure that the account you choose will let you do this.
• Can you afford to tie your money up for a long period? If so a fixed term account may be an option for you.  If the answer is no, consider an account that allows withdrawals with a shorter or no notice period.
• How important is the rate of interest to you? Sometimes higher returns on your savings may mean that you have to forfeit some flexibility.

Paying tax on your savings

You should bear in mind that interest rates on savings accounts are usually quoted without tax deducted. For basic rate taxpayers, 20% of the interest earned goes to the taxman. For higher rate taxpayers it's 40%.

Top tips

• If you are a non-tax payer or if all your income is covered by your tax allowance, ask your bank for Inland Revenue form R85. Hand the completed form to your bank and it will arrange to pay your interest without deducting tax.

• If earning a high rate of interest is important to you don't put your money into an account and then forget about it. Consider regular saving 'health checks' - check the rate you are receiving and keep an eye out for new products which might pay better rates of return.
  

Should you save or invest?

Cash savings provide a safe home for your money.  Cash savings are probably for you if you don't want to risk losing any of your capital, that is the money you deposit.

With Investment products higher returns are possible, but you could be at risk of losing part of your interest or even some of the capital you started with.

Rainy day saving

As a priority it is a good idea to put a little extra money aside, somewhere safe but where you can get to it if you need it, just in case.

This extra money could provide you with a 'cushion' if something unexpected were to happen. You know the kind of thing - the boiler packing up, the car failing its MOT, a last minute school trip to pay for.

Having a 'rainy day' fund set aside can also save you money. That's because, as well as earning interest on your savings, having that nest egg there means that if you do have to make an emergency purchase you may be able to pay for it outright. That way you won't need to borrow money and you'll avoid paying interest charges.

How much should you put aside?

Ideally you should try to save up three months' expenditure that you can get your hands on quickly. This should cover most eventualities and provide you with a bit of breathing space if, for example, you lose your income. This probably seems like an awful lot of money but if you don't have that at the moment don't panic - just start small and build up your savings gradually.

There are lots of savings accounts around - shop around for the one that suits you best. The main thing to consider for your 'rainy days savings' is to ensure it's an 'instant access account' - that means one where you can take your money out immediately.

The first stage is to work out what you can afford to save every month (or weekly if you receive a weekly income). Our budget planner can help you to do this.

Paying money into your 'rainy day' savings account

Most financial institutions allow you to transfer money between accounts by telephone or via internet banking - alternatively you can set up a standing order that will do this automatically. You tell your bank to transfer a particular amount of money regularly to another bank account on a date choosen by you.

A standing order is always for the same amount of money, and always happens on the same date so is ideal for regular payments, for example, to your savings account. You can also pay in cheques and cash at any branch.

Fixed rate savings

Fixed rate savings accounts guarantee you a specific rate of interest, for a set period of time (usually between 1 - 5 years although different terms are available) so with this type of account you'll know exactly how much interest you are going to earn. If you can tie your money up for a while, these types of account usually provide you with a higher rate of interest than an instant access savings account. The majority of fixed rate savings accounts do not allow you to pay in any more money once the account is open.

Is my money safe?

Provided your money is in a UK regulated bank or building society account, it's protected under the Financial Services Compensation Scheme (FSCS), which guarantees £50,000 per person, per financial institution. Over the years many financial organisations have merged and it is not always that clear what constitutes a 'financial institution'. Further details of the Financial Services Compensation Scheme are available at www.fscs.org.uk.