The art of saving is pretty straightforward, but you do need to make some choices on what type of savings account will allow you to maximise the interest on offer by savings providers.
Millions of savers could be missing out on the best savings rates and losing out on growing their money, with a study by TotallyMoney finding one in three (37%) people haven’t switched accounts for five years, and 27% have never switched.
So even if you already have savings it might be time to move them to a better paying account.
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Rachel Springall, finance expert at comparison service Moneyfacts, says: “A regular savings account is a good choice to instil the savings habit, as many of these accounts require savers to put money away every single month."
She notes easy-access accounts provide "the most flexibility", which may appeal for savers who "want a pot they can quickly access in case of a financial emergency".
With easy-access and regular savings accounts offering attractive rates of interest, we look into where your cash could be better off.
How does an easy-access savings account work?
An easy-access savings account does what it says on the tin – it gives you flexibility with your cash. Traditional easy-access savers allow you to access your savings whenever you like and give you freedom on withdrawals.
The interest rate you earn is applied to the total in the account, though it is variable, which means it can change at any time depending on market movement. These simple savings accounts are great for a rainy day or emergency funds, whilst still earning interest on your money.
That said, lenders are imposing more and more hidden restrictions on easy-access accounts despite a high headline rate – to lure you in.
Restrictions include limits to withdrawals, a bonus rate in the headline rate for a fixed period, and eligibility restrictions could also apply, like having to be a current account customer.
Springall says savers should “check terms and conditions carefully as some easy-access accounts pose withdrawal restrictions, so it’s vital consumers stay within any limits to benefit from the full interest rate on offer".
How does a regular savings account work?
Regular savings accounts typically pay a more attractive rate of interest than those offered by easy-access savings accounts. Plus, unlike easy-access rates, those on a regular saver tend to be fixed, giving you certainty on the interest you earn.
However, they are less flexible than easy-access accounts as they come with caveats. The most common feature of a regular saver is it will set a minimum payment you need to pay monthly into the account. There are also limits on how much you are allowed to pay in and withdrawals are normally restricted or not allowed at all (without forfeiting the interest).
Plus, a lot of regular savers require you to be an existing customer of the bank, but that’s not the case with all accounts.
It’s important to understand that the way the interest is applied with regular savings accounts doesn’t mean that you would get the full advertised rate on each deposit.
The advertised rate only applies on savings deposited for the full year. So if you were paying in £50 a month, the first £50 will have been saved for 12 months and earn the full percentage. The second £50 saved will only be in the account for 11 months. So you’ll earn eleven month’s worth of the quoted rate on that £50. The next £50 will be ten month’s worth, and so on.
Easy-access versus regular savings accounts
Top paying regular savers today can reach 7%. First Direct is currently offering 7% for current account holders saving between £25 and £300 a month.
However, the way the interest is applied with regular savings accounts doesn’t mean that you would get 7% on each deposit.
As we have explained, this rate only applies on savings deposited for the full year.
If you continued paying in the maximum each month, you would pay in £3,600 and earn £136.50 in interest after 12 months.
Assuming that you have a lump sum of £3,600 to save, here’s how much interest you would earn if you drip-fed your cash monthly into a regular savings account.
The interest is worked out based on the monthly balance, then paid annually.
The table below illustrates how the interest on £300 monthly deposits is determined, based on a regular savings account paying 7%.
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How much interest would I get in a top regular savings account?
Monthly payment
Months invested for
Interest (top regular savings rate 7%)
£300
12
£21.00
£300
11
£19.25
£300
10
£17.50
£300
9
£15.75
£300
8
£14.00
£300
7
£12.25
£300
6
£10.50
£300
5
£8.75
£300
4
£7.00
£300
3
£5.25
£300
2
£3.50
£300
1
£1.75
Total
£136.50
The top-paying easy-access savings accounts are much less attractive than the rates offered by the top regular saver account providers.
You’re likely to get an interest rate of around 4% for easy-access savings accounts.
Take for example the Post Office’s Online Saver which currently pays 4.4%.
If you deposited the full £3,600 in this account you would earn interest of £144 for the year.
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How much interest would I get in a top easy-access account?
Deposit
Interest earned after one year (top easy-access rate 4.59%)
Interest earned after one year (average savings rate 2.79%)
£1,200 (lump sum deposit on day one)
£55.08
£33.48
£3,600 (lump sum deposit on day one)
£165.24
£100.44
Will your monthly savings go further in a regular savings account or easy-access account?
If you don’t have a lump sum and plan to save monthly then it’s worth crunching the numbers on this too.
Is my money better off in an easy-access savings account or regular savings?
You ideally need to weigh up the rate offered on each account, the amount you have to save and if you might need to access your money any time soon.
If you already have a lump sum, you can pay it into an easy-access account and drip feed the maximum into a regular saver so get the best of both worlds.
If you intend to save monthly on payday, perhaps, it comes down to the rate available and whether you need access to the money.
While the numbers using our examples above suggest you’d be better off with an easy-access account with a lump sum, it’s worth remembering that there is no guarantee that the headline rate will stay the same on an easy-access account, as it’s a variable rate.
On the other hand, some regular savings accounts offer a fixed rate for 12 months, which at least gives you certainty on what you will earn.
Our average savings by age article explores how much money different groups of people have put aside.
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Holly Thomas is a freelance financial journalist covering personal finance and investments.
She has written for a number of papers, including The Times, The Sunday Times and the Daily Mail.
Previously she worked as deputy personal finance editor at The Sunday Times, Money Editor at the Daily/Sunday Express and also at Financial Times Business.
She has won Investment Freelance Journalist of the Year at the Aegon Asset Management Media Awards in November 2021.
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