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How Should I Save My Cash?
When you're able to put some of your money away, you may well put it straight into a savings product offered to you by the same provider of your current account. While you may get lucky with your bank offering the best savings product for you, the chances are that you won't be getting the best rate of interest. There are quite a few factors to consider in getting the best savings product, but it's certainly not a difficult process to obtain the best one. A couple of phone calls, internet forms or letters is all it really needs, and you could see your money make you hundreds or even thousands of pounds extra every year.
Traditional savings accounts are easiest savings product to understand. With this in mind, it's little surprise that so many people are keen to put their money into one of these and then not worry about it. However, savings accounts can be negatively affected by two factors: interest rate changes and tax.
Before taking out a savings account, take a look at its AER % - this is the number that will determine how much money your deposit will gain you each year. You will find that most rates are quoted as being 'variable', which means that they can change at any time. The time that they are most likely to change is when the Bank of England decides to change the base interest rate. Of course, they can put the base rate up, which is good for savers, but they can also put it down, which is bad. Over times when the economy isn't doing so well, as is predicted for 2008, then there are likely to be interest rate cuts.
The second factor for savings accounts is that they are affected by tax. This means that the government takes a scoop of your savings away as tax every year ' sometimes as much as 40% if you're a high earner. If you're shopping for the best savings account then always take into account the net interest quoted. This is the amount of interest you will receive aftertax. The 'gross' interest rate that can often be quoted is not necessarily the most important. Take a look at Motley Fool for a comparison table for the best savings accounts.
One of the best ways to avoid tax on your savings is to put your money into a cash ISA. Because there are limits on the amount of cash you can point in an ISA, they're ideal for savers who don't have a particularly large sum to invest. This year the amount you can put into the cash component of an ISA stands at £3000, but this is set to rise to £3600 from 1st April 2008. The thing to remember with an ISA is that although you won't pay tax, you'll still probably have a variable rate. Take a look at Alliance and Leicester for one of the top ISA products out there. They can offer a huge 10% AER for customers who also take out the Premier Current Account.
The way you can beat changes in the base rate is through investing in a fixed term deposit account. This is an account where you put money in for a fixed term, say twelve months, with no further deposits or withdrawals allowed without penalty until the end of your term. These accounts are often referred to as fixed rate bonds. While you won't lose out from interest rate drops, you also won't gain anything if interest rates go up. Additionally, you'll more than likely pay tax on this product, so look out for the net interest rate in a similar way to a traditional savings account. The best time to use this product is in a period where interest rates are predicted to go down, and if you plan it right they can be the most lucrative out of the three different products mentioned.  Take a look at Kaupthing Edge for what is currently the most competitive fixed rate bond on the market at 6.86% net interest (3rd March 2008).