Financial Products Series: Savings Accounts

The Financial Products series, to briefly explain and evaluate a wide variety of financial products/ This series should be useful to anyone who wants to gain a brief knowledge of different financial products.

This article is the fifth in a series of 12 that outlines in simple terms different financial products, how they work, advantages and disadvantages, and how I would rate them. The Products that this series will cover are:

1. Shares
2. Structured Products
3. Cash
4. Current Accounts
5. Savings Accounts
6. Annuities
7. Certificate of deposit
8. Options
9. Treasury Bills
10. Bonds
11. Tracker funds
12. Credit

If any of you can think of any other financial products that you feel deserves a place on this list please get in touch and let me know, or else comment below.

Savings Accounts

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A savings account is primarily an account with which depositors can put their money, earn a return on their savings and be fairly comforted in the knowledge that their money is safe. There are many different types of savings accounts.

Instant Access and Everyday Savers Accounts: Depending on the particular account invested you can save anywhere between £1 to £5,000,000. Accounts fall into two categories with some paying out interest monthly and others annually. Rates of interest depend on current Bank of England Base rates and on levels of inflation. At the time of writing, in the UK, interest rates tend to be between 2% and 3.2%.

Monthly Savings Account: These sorts of accounts tend to be very similar to the Instant Access and Everyday Savers Accounts. These accounts commit the holder to drip feed a certain amount of money into the account each month for 12 months. Amounts tend to range between £20 up to £500. The rates of return tend to be decent but with hefty penalties for early withdrawal.

Notice Accounts: These savings account tend to offer slightly better rates of interest than the Instant Access account however they require a certain period of notice to withdraw the money. This could be anywhere between a week to 90 days.

Cash ISAs: These savings accounts utilize your £5,640 allowance for a tax free cash investment. Any interest earned in these savings are tax free. These sorts of account tend to offer better rates than all previously mentioned accounts. However, they may not be instant access and could require you to hold for a number of years. Currently the rates on offer vary between 3.35% for an easy access account to 4.25% for a fixed term arrangement.

Advantages

• Extremely low risk asset
• Inflation meeting/ beating returns (most of the time)
• Caters for specific needs in terms of access
• Can utilize tax efficient ISAs
• £80,000 covered by the Financial Services Compensation Scheme

Disadvantages

• The rates aren't very impressive
• The investment would not be considered exciting or interesting (although there's nothing wrong with that in my opinion)
• It doesn't utilize your full ISA limit as it does not include the extra £5,640 allowance for an Investment ISA since the majority of savings accounts are cash only

Overall conclusion

A safe and secure investment. They do not offer big rewards as there is very little risk taken. 

Score: 8

Advice: I believe that 30% of your current wealth should be held in cash. I myself hold about 10% at the moment. This is because I am foolish and more of a risk taker. I believe I can afford to take risk since I am young and have no dependents. However, 30% in savings accounts (as cash) is a number that I have just read. I'm not sure what the optimal amount is. Please enlighten me in the comments section below.

Readers, what are your preferred methods for saving? What percentage of your money should be held in savings accounts? Should they be instant access?

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