FOOL'S EYE VIEW
Supersize Your Savings!

By Cliff D'Arcy
October 14, 2004

Early in my career in financial services, I received a sage piece of advice from one manager. This wise office philosopher said, "Most problems will go away if you throw enough money at them".

From personal experience, I have to say that this saying is spot on. In the days when money was short chez D'Arcy, every problem that came along either knocked my finances for six or involved hours of effort to resolve. However, since I got Foolish and started planning ahead (a painful process that began about six years ago), my life has become a whole lot easier.

Without a doubt, having a healthy savings balance works wonders in times of crisis. In recent years, my wife and I have had to fork out for various kitchen calamities, including repairs to our dishwasher and fridge, plus a new boiler (£1,200 – crikey!). Other hefty bills have arrived for a larger family car, holidays, damp-proofing treatment to our home, plus car servicing, maintenance and insurance. You know the sort of thing.

The good news is we've paid all of these big bills – expected or otherwise - by dipping into our savings. In fact, since my wife bought her previous car back in 1997, we haven't borrowed money to buy anything, which must have saved us thousands of pounds in interest!

What's more, it's a great feeling to go from paying interest to earning it. Even better, from this point, the banks no longer have you at their mercy (apart from your mortgage lender, of course!).

Without further ado, here are three ways to supersize your savings:

Earn tax-free interest

Which of these three savings accounts would you prefer (this isn't a trick question, honest)?

1. A taxed account that pays, say, 2%, after the taxman's had his share.
2. A taxed account that pays over 4%.
3. A tax-free account that pays over 5%, with every penny going into your pocket?

This is a no-brainer, isn't it? Of course you're going to choose option (3), aren't you? Surprisingly, most people's savings accounts fall into group (1). Here's how I'd describe these accounts:

1. Is a typical instant-access savings account of the sort available from most high-street banks, which pays, say, 2.5% gross interest a year. This drops to 2% after you lose a fifth of your interest - 0.5% - to the taxman.
2. Is a Best Buy no-notice savings account, paying over 5% gross interest, or over 4% after 20% tax. In a quick online search, I found roughly a dozen accounts in this category.
3. Is a Best Buy cash mini-ISA, a savings account that pays tax-free interest. I found ten cash mini-ISAs in this delightful group.

So, why do so few savers choose option (3), when it's so much more lucrative? After all, earning 5%+ a year instead of 2% means 2½ times as much interest, doesn't it? Perhaps it's because the public is frightened of the jargon that comes with ISAs. But, in a nutshell, here are the basics of cash mini-ISAs:

• Anyone who is at least sixteen can open a cash mini-ISA.
• You can put in up to £3,000 this tax year (which ends on 5 April 2005) and next tax year. Sadly, this limit plummets to £1,000 per year from 6 April 2006. Oh dear!
• A couple can each open one cash mini-ISA per tax year.
• The interest you earn isn't taxed and doesn't have to be declared on your tax return.
• Most cash mini-ISAs give you instant access to your cash, plus penalty-free transfers. (To be honest, I'm not keen on tying up money in notice accounts.)
• If you put in the full £3,000 and then draw out any money, you can't put that cash back into your ISA, because you've already hit your limit. You'll have to wait until the next tax year and open another ISA.

Clever cookies who have deposited the maximum £3,000 a year into cash mini-ISAs since they were launched in 1999 now have £18,000 legally stashed away from the taxman (£36,000 for a couple). Tasty!

In my view, you can't call yourself a proper saver until you've got yourself a cash mini-ISA. So go and get one today!

This Best Buy cash mini-ISA account pays 5.10% AER. Apply via the Fool.

Find a Best Buy account – and make sure it stays good!

If you've filled up your cash mini-ISA and want to save more, find a Best Buy no-notice account. As I mentioned above, the top twelve pay annual gross interest of over 5%. Our Savings centre includes these two table-topping beauties:

Two top no-notice accounts
Bank	Headline gross rate per year	Introductory bonus	AER	Minimum and maximum deposits	Apply via the Fool
Alliance & Leicester	5.35%	None	5.35%	£1 to £25,000	Apply
ING	4.89%	None	5.00%	£1 to £2m	Apply

One thing I always do when comparing savings accounts is to look at the Annual Equivalent Rate (AER). This presents a truer picture of the ongoing rate than the headline rate does. That's because headline rates can be distorted by introductory bonuses. I'm not keen on short-term introductory bonuses, which firms use to get into the Best Buy tables, as they don't equate to long-term value. Also, checking the AER tells you straight away whether an account pays an introductory bonus that lasts for under a year, as the AER will be lower than the gross headline rate (as in the above table).

So, gather up all the cash that you have lying around in other inferior accounts, jars, moneyboxes and down the back of the sofa, and whack the lot into a Best Buy savings account. But don't sit back and congratulate yourself just yet, because there's one more thing to do. Bookmark the webpage that displays the interest rate for your new account (in other words, add it to your Internet browser's 'Favourites' folder). Visit this page, say, once a month – and if your rate starts to look unattractive, it's back to the Best Buy tables for you and your loot!

Get the regular savings habit!

In recent years, I've become a big fan of regular (monthly) savings accounts, which are a great way to save up for a particular purchase. For example, you could save every month towards a new car, holiday, television, home improvements or next Christmas. Regular-savings accounts pay some of the best rates to be found - but putting aside a set amount each month requires a little financial discipline. Also, most regular-savings accounts have stiff strings attached, with most banning or limiting withdrawals in your first year.

Since 2003, I've been building a savings pot for my daughter by saving £100 a month by direct debit into a Halifax Regular Saver account. This pays a one-year fixed rate of 6.05% AER on between £25 and £250 a month. The recently launched Abbey Fixed-Rate MonthlySaver account pays a one-year fixed rate of 6.50% AER on between £20 and £500 a month.

However, Halifax plans to top Abbey: from Saturday, it is increasing the rate on its Regular Saver to a stonking, beats-them-all 7%. This rate war is good for savers, that's for sure!

STOP PRESS: coincidentally, this afternoon, Abbey announced that it was increasing its rates for new and existing MonthlySaver customers to 7%, which makes it the juiciest savings account in the UK!

So, forget about future changes to house prices, interest rates, unemployment and so on. Assume the best and plan for the worst by saving more today!

More: We have six top-paying accounts in our Savings centre, plus a Best Buy cash mini-ISA.

Cliff owns shares in HBOS, the parent company of the Halifax.