Savings accountsYoung people are often accused of being profligate with their money, but the truth is that with living costs skyrocketing and wages becoming ever more compressed, saving these days is about much more than simply cutting out takeways and taxi journeys (though admittedly that does help).
To really bring that big purchase a step closer to reality, you also need to be proactive, putting what money you do have in a place where it actually generates income instead of just sitting in your current account collecting cobwebs.
And that's where savings accounts come in.
Why do I need a savings account?
Put simply, savings accounts are an easy way to earn interest on money that you don't need to use on your every day living costs. In exchange, the bank requires you to leave it untouched for a pre-agreed length of time, imposing a penalty (i.e. the loss of interest) where you need to dip into it before the deadline.
How much money can I earn?
It depends on a few factors - namely what level of interest your bank of choice offers, how much money you're prepared to put away, and perhaps most importantly how long you're prepared to forego access to the funds for.
In general, you can expect the most enticing interest rates to land somewhere between 1.2 and 1.5%, which probably doesn't sound like a huge amount, but keep in mind that this can really add up over a period of, say, a decade, particularly if you have a few grand to deposit at the outset.
Providing you do go big, you can fully expect to make a couple of hundred pounds over the course of two or three years, which is not to be sniffed by those looking to purchase their first home or perhaps go on a once-in-a-lifetime trip.
Don't forget: it's tax free, and all you have to do is sit tight and watch the pennies add up.
What should I look for in a savings account?
Banks have never been known for their generosity when setting interest rates, and in 2020 it's the same old story. The average rate in the UK is a meager 0.9%, and since this number is tethered to the health of the economy at large there's no guarantee it will stay even this high in the uncertain months and years ahead.
With that being said, it always pays to shop around. Some banks are prepared to go as high as 1.5 or even 2.0%, but the caveat, of course, is that these ones will generally set a relatively low upper deposit limit (often as little as £500, which isn't going to accrue much interest whatever the rate).
Type of interest
Broadly speaking there are two types of interest offered with savings accounts. In short, standard interest is calculated based on the sum that you bank initially, whereas compound interest takes into account the increments that you've earned in the time since.
If you can a bank that offers the latter, it will potentially have a big impact on the amount you're able to save, especially if you sign up for a multi-year contract.
For obvious reasons, longer contracts are often preferable when it comes to savings accounts, both for the customer and the bank. They have more time to play with your money, while you get to accrue some serious interest.
But don't forget: it can sometimes pay to be flexible too. For one thing, you don't want to find yourself in a situation where you need access to your funds for an emergency and have to risk losing your interest through an early withdrawal.
Aside from that though, you also want to keep your options open. Let's say the economy picks up and banks start being more generous with their interest rates. By having a short-term deal you can simply cancel your account with one provider when the deadline comes and head on over to another, allowing you to earn more money simply by switching banks.
In general, you should be looking to review your savings account situation roughly once a year. For better or worse, banks change their interest rates for a number of reasons, and when they do it often has a knock-on effect on the rest of the sector.
In today's day and age none of us are ever more than a hefty phone bill away from needing to tap into our rainy day funds, and that's why it's always important to have a look at the penalties imposed by your bank for an early savings account withdrawal.
If you want to be more cautious, you can even try and find an account that permits a certain number of withdrawals per year. That way, even if you do run into a spot of financial bother you can still keep the interest ticking over in the background.