6 things you should think about to make the most of your savings

Finding the best possible interest rate is a priority for any saver. With the recent reduction in base rate to 5% and inflation at 2.2%, savers are enjoying more favourable returns from their savings than they have over previous years.

Here’s what you need to know about saving your money in 2024. 

Are interest rates likely to rise? 

Interest rates were consistently rising over the past few, and were recently cut in August 2024, and are no longer being outpaced by inflation.

With the Bank of England (BoE) reducing the base rate from 5.25% to 5%, many savers, households and businesses are experiencing slight financial relief.

High interest rates are good for savers but bad news for borrowers. If you have a savings account and some form of debt, such as a loan, credit card, or mortgage, you may end up worse off due to higher interest payments.

Banks are passing on higher interest rates to savers, but unsurprisingly, they also pass them on to borrowers.

How much interest can I earn?  

The amount of interest you can earn on your savings is constantly changing. As of July 2024, a market scan suggests the highest rate currently on offer is around 4%-5% on a notice account. 

However, if you're prepared to lock away your money for three years in a fixed savings account, you could receive even more than 5% per annum, according to data from Forbes.

The average easy access account is around 5%, correct at the time of writing. You'll need to browse the market when you’re looking to open an account, as rates can change from month to month.

A financial adviser can support you in finding the right type of savings account for your goals, and then the best rate in the market. 

What is the impact of inflation on savings?

Inflation massively diminished the power of savings over the past few years, although this trend has been somewhat eased by the recent base rate reduction and falling inflation.

The UK's main measure of inflation, the Consumer Prices Index, was 2.2% in August 2024, unchanged from July. The Bank of England notes that inflation is currently at its lowest level in nearly three years, and expects minor increases throughout the remainder of the year.  

Previously high inflation rates were significantly decreasing how far each person’s money went.

 However, as interest rates have dropped significantly, decreasing from 11% in the autumn of 2022 to 2.2%, savers and spenders may find their money stretches further, providing much-needed financial relief.

In simple terms, inflation makes things more expensive and impacts everything from food and clothing to fuel.

Even though it doesn’t reduce the amount of money in your pocket, it means £1,000 will no longer buy you as much as it used to. Conversely, the lower the inflation rate is, the more spending power each pound will offer. 

There is the possibility to use a high-interest savings account to overcome these issues or government bonds which offer a hedge against inflation.

A financial adviser can help you to understand if one of these types of savings is better suited for you. 

What are the different types of savings account? 

Broadly speaking, there are five different types of savings account. 

1. Easy access savings accounts – The most common type of cash savings account allows you to add money and withdraw it virtually as you like (within the limits of each particular account). But you’ll pay a price for this instant access, as these typically have low interest rates. It’s best to use an easy access savings account for something like an emergency fund. 

2. Notice accounts – Somewhere between easy access and fixed rate is the notice account. You won’t be able to instantly withdraw your money, but you can request to take it out following a ‘notice period’. Generally, this will be between 30 days and 180 days (six months). If you don’t anticipate you’ll need the amount you’re saving urgently and want higher interest rates, but don’t want to pay a penalty for choosing to withdraw, this is a good option. 

3. Fixed-rate savings accounts – You can have either a fixed-rate savings account or an individual savings account (ISA), but the premise is the same regardless. You’ll lock in a set interest rate, which is typically higher than that offered by an easy-access account, for a certain period of time. If you take the money out before the end of the term, you’ll face a financial penalty, so it’s best to save money you can afford not to access for that specific period.

4. Regular saver accounts – These accounts ask that you put in a set amount each month for a period that’s typically around 12 months. You could face a penalty if you miss even one month’s payment, and you generally won’t be allowed to take the money out at all until the end of the term. 

5. Individual savings accounts (ISAs) - You can save up to £20,000 tax-free per financial year into an ISA, which can be both easy access and fixed rate. There are a few different types, from cash, stocks & shares to innovative finance. Find out which is right for you in our guide to ISAs. 

Is investing better than saving? 

Both investing and saving have pluses and minuses - which one is right for you will generally hinge on how long you wish to save or invest for. In short, if you're happy to tuck your money away for five years or more, then investing is likely to be the better option.

When investing, your money will go into things like stocks and shares that can rise and fall in value. The longer you invest for the better chance you have of riding the stock market ups and downs and seeing your money grow.

This differs to saving which tends to involve sticking money in cash-based accounts. But while any money in cash cannot reduce in value, and grows by the addition of interest, it's not risk free. If inflation is higher than the amount of interest you receive, which is the case right now, the real value of your money will reduce. 

For instance, if you put £10,000 in your account, you will still have that £10,000 (plus interest) in your account in five, 10- or 20-years’ time. However, that £10,000 may not go as far as it would’ve when you first deposited it.

According to the Bank of England’s inflation calculator, goods or services that cost £10,000 in 1990 would cost around £24,000 today. 

A further risk to cash savings is the bank of building society going bust. The Financial Services Compensation Scheme guarantees to protect up to £85,000 per person per banking group (e.g. Lloyds Banking Group) in the event of this happening, meaning any savings above this figure could be lost.

Should I save or pay off debts? 

If you can, it’s generally wise to try and clear debts before saving – but there are two exceptions. The first is if the interest rate on your debts is lower than your savings interest rate.

In this economic climate, this will typically only be the case on interest-free credit cards, which can allow you to sensibly build credit and earn a small amount of interest on your savings. 

The second exception is if you have a large debt that will penalise you for paying it off too soon, like a mortgage or large personal or business loan.

Overpay as much as you can and leave the rest of your money in a savings account to grow until the penalty is either removed or negligible. 

Whatever you choose to do, try and leave yourself an emergency buffer fund that you can draw on in case of financial emergencies.

If you pay off all your debts only to have an unexpected breakdown a week later, you could find yourself back in debt without some savings to cover your costs. 

Get expert financial advice

With the BoE reducing the base rate to 5% in August 2024 and inflation dropping significantly over the past few years, the financial landscape for savers is looking more promising than it has in a while. 

High interest rates mean that savers will see higher returns on their savings in general, while also helping to slow inflation and stretch the value of your money further.

Let Unbiased connect you with an expert financial adviser who can recommend the best savings accounts and strategies to help you maximise your returns and meet your unique financial goals.

If you're interested in getting your finances in order, you can get a free financial health check here. You might also find our article on the cash stuffing method informative, too.