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FOOL'S EYE VIEW
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Why is it that it's so easy to fall into bad habits (and give them up), yet so hard to acquire good ones? For instance, take smoking, which I'm trying to stop at the moment. It's easy to take up this awful habit but, thanks to its addictive qualities, tobacco can be fiendishly difficult to quit. However, several of my friends have quit or are making a genuine effort to do so, so I'm determined to join them. But temptation is a terrible thing! One good habit that we Brits struggle with is saving. Compared to our European cousins, we're not terribly impressive savers. French, German and Italian savers stash away almost a sixth of their disposable income (about 16%), while Spaniards save around a ninth of theirs (11%). However, we spendthrift Brits currently save just one pound in eighteen of our spare cash (5.5%). Oh well, at least we're the richest people in Europe, although we won't be for long if we don't start saving more! There's no question that Britons could certainly do with saving more, even though we already have almost £500 billion on deposit. This cash mountain averages out at around £20,000 per household but this wealth is very unevenly distributed. In fact, roughly six million people own almost three-quarters of it! Some people are put off saving simply because the UK savings market is so fiendishly complicated. How do you go about sifting through the hundreds of savings accounts to decide which one is right for you? Well, here are five tips to stop what I call 'paralysis by analysis' and help you to find the savings account of your dreams! (For information on saving specifically for children, read this article.) Carefully check (and re-check!) your interest rate Your first step to increasing the interest that you earn is to find a top-paying account. Check the Best Buy tables in the weekend newspapers and Teletext. Even better, visit Moneyfacts, which compiles most of these tables and offers an easy-to-use savings search engine. It's easy to find an online instant-access account paying 5% or more. In fact, I found fifteen in a quick Internet search. Our savings centre includes three of these gorgeous accounts: However, once you've opened a new savings account, don't take your eye off the ball. Banks have a nasty habit of replacing accounts with new-fangled versions and then cutting interest rates on these 'dormant' accounts. Check your rate occasionally (I suggest monthly) to make sure that you're not being taken for a ride. My tip is to find the webpage that shows the interest rate for your account and bookmark it (add it to your browser's 'Favourites' folder) for easy reference. Also, don't be afraid to be a 'rate tart' – if you can find a better rate elsewhere, move your money if it's worth your while. But watch out: is it really worth the hassle of switching to earn an extra 0.1%, which comes to £1 for every £1,000 you have on deposit? Why pay tax on your interest? If you have £3,000 on deposit earning 5% a year, your gross annual interest (before tax) comes to £150. However, if you're a taxpayer, the taxman will nab a fifth (20%), which means you end up with £120. Higher-rate taxpayers lose a further 20% and end up with a mere £90. (If you're not a taxpayer, fill in form R85 to stop tax being deducted – this goes for children's accounts, too). Now, wouldn't you rather have the whole £150? Well you can, so long as you put it into a special type of savings account called a cash mini-ISA. You can pay in up to £3,000 per tax year into a cash mini-ISA, which pays tax-free interest. Don't be frightened by the jargon - you can learn more in this article. The top postal ISA (from Abbey) pays 5.35% AER; an online Best Buy rate is 5.10% AER from Intelligent Finance, which is available via the Fool. Beware of introductory bonuses! In a recent article, I warned savers to be wary of accounts with introductory bonuses. That's because many bonus-paying accounts aren't Best Buys when the initial bonus ends after, say, six months. However, two bonus-paying accounts have caught my eye, as both pay their bonus for twelve months and, in my opinion, it's not too much effort to switch after a year. The first is an online account from Birmingham Midshires, which pays 5.40% AER (4.95% plus 0.45% one-year bonus) on £1 to £5m. The second is a telephone account from The AA, which pays 5.36% AER (4.66% plus 0.7% one-year bonus) on £500 to £5m. By the way, I have a neat trick to establish whether an account pays an introductory bonus that lasts for less than a year. Simply compare the gross annual interest rate with the AER (Annual Equivalent Rate). If the AER is lower than the gross rate, the account pays an initial bonus that lasts for less than a year. Easy peasy! Don't ignore regular-savings accounts After my daughter was born last year, I scoured the Web for an account me to pay money into on her behalf. I'd settled on a figure of £100 a month and wanted a tip-top interest rate. The best deal wasn't a Best Buy instant-access account – it was a regular-savings account. Sadly, most savers fail to realise how attractive regular-savings accounts are. They pay top rates of interest, and can be used to build up a nest egg or pay for a holiday, car, Christmas, children's savings and big purchases. (However, given their restrictions, they're not suitable for your emergency or 'rainy day' fund.) Note that regular-savings accounts require more discipline on your part, because they usually require fixed payments of, say, £5 to £500 to be made by monthly direct debit or standing order. Most of the Best Buys are pretty strict on this – miss a required payment and you could lose an attractive bonus (others allow you to skip one or two payments per year). Some have withdrawal limits or don't allow any withdrawals before maturity, so you need to be patient, but if a disorganised dope like me can save monthly, so can you! Best Buy monthly-savings accounts come from Abbey, Halifax and several building societies (some of which allow only local residents to open accounts). Interest rates on these Best Buys range from 5.30% AER to a juicy 6.50% AER, which beats every other savings account hands down! Give notice accounts the elbow! Notice accounts used to be the ideal choice for savers who could resist dipping into their savings regularly. They paid top-notch interest rates, often fixed for long periods, which is ideal for big savers. In return for tying up your money for, say, sixty days, you could earn a higher rate of interest than was generally available on instant-access accounts. However, times have changed and the instant-access accounts mentioned above beat the pants off any notice account that I could find! Unless you need seriously lack financial discipline, why bother putting up with financial handcuffs, such as transfer penalties and limited withdrawals, in return for a lower rate? Finally, I have to say that I'm a huge fan of saving (and investing in shares, but that's another story). That's because I've spent most of my adult life in debt, paying sky-high interest rates. And I can tell you that it's a truly fantastic feeling to be earning interest instead of paying it, which I plan to do for the rest of my days! More: Earn more interest in our Savings and Cash Mini-ISA centres. Cliff owns shares in HBOS, the parent company of Halifax and Birmingham Midshires.