FOOL SCHOOL
Where To Save

January 30, 2004

Your emergency fund and any funds you'll need within three to five years should not be at risk in the stock market. It should be in a "safe" place. So you should put that money somewhere you'll be able to get your hands on it quickly... in case of, well, an emergency. Or when you get presented with a bill for that shiny new Merc you've always wanted...

You'll need to consider three criteria: first, and most importantly, what interest rate the account pays; secondly, how easy it is to get hold of your money when you want it; and thirdly, what special terms the account provider imposes. Once you've made a decision about where you want keep your money, then keep an eye on that vital interest rate. These naughty finance companies have a habit of luring you with headline rates and then dropping the rate after a few months. If you don't particularly want to be a rate-chaser then look for a company that has had consistently good rates even if they aren't always the best rates.

Cash ISAs

These Individual Savings Accounts are tax-protective wrappers for your money. Many cash ISAs pay top rates of interest and there is no tax to pay on any of the interest earned. You can put in up to £3,000 each tax year but unfortunately that's all you can put in, so the annual tax advantages are quite small. Using up part of your ISA allowance for cash will also restrict the amount you can put into a share-based ISA. However, they're easy to open and you can usually get at your money immediately.

Instant Access Accounts

The humble savings account is where many of us park our dosh. It's easy to get access to our money at short notice but the rates paid are often not overly generous. Many companies have a wide range of different accounts, introducing new ones every now and then as a marketing tool to draw in more money whilst rates fall away on older accounts. So you should check your rate of interest on a regular basis, say every 6 months, and be prepared to move your money to another account or another company, if necessary.

Some of the best rates are paid on internet accounts where you can get more than the Bank of England's base rate. For a branch-based account you might be looking at a couple of per cent lower with their highest rates only kicking in when you have more to invest, say £25,000 plus.

Notice accounts

If you know that you definitely won't need your money straight away, then you might be able to get a better rate of interest in a notice account. With these, you have to give a certain amount of notice, say 90 days, before withdrawing your money. Giving up the right to get at your money quickly gives the bank or building society more flexibility, meaning that they can afford to give you a slightly better rate of interest. Again, if you manage your account online, you'll generally get a better rate.

Fixed-rate deposit accounts

This is where you deposit your cash at a given rate of interest for a fixed period of time. Whilst you would usually get more than you would get in an instant access account, the higher rates may also reflect the fact that the company providing it expects rates to rise a little over the time period as well in which case you'll be stuck at your fixed rate. It depends how long you want to tie yourself in for too.

Current accounts

Most current accounts pay a pitiful rate of interest, usually only a fraction of 1%. Not surprising really since they're meant for transactions, not savings. But a number of recent new launches, especially for online accounts, offer similar rates to branch-based Instant Access accounts so look out for those. It's worth considering an online account that pays interest for your day-to-day-banking anyway. If you can time your bills so that they're paid, say, four weeks after your salary has gone into your account, then you'll get pretty much the maximum interest each month.

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