The following is a guest post.
Whether you’re saving for a specific purchase, such as putting down the deposit on a house, or simply taking precautions and putting money aside for a rainy day, saving can help you achieve your goals and give you the financial nest egg you deserve.
Very few of us are in a position where we can buy or pay for everything we want outright. The two main choices when it comes to major purchases are to save or obtain credit. Credit can be a convenient solution for many but is it the best choice?
Credit: the problems
There are many problems associated with borrowing. According to The Money Charity, the average household debt (excluding mortgages) in the UK was £6,020 as of the end of September 2013.
If you’re not careful about how you manage your debts, figures like this can soon spiral out of control and cause serious financial difficulties. For some people, debt problems arise by irresponsible borrowing that mounts different credit agreements on top of each other while for others it’s merely a matter of failing to account for changing circumstances when taking credit agreements.
Whatever the cause, debt is a serious problem for Brits and the Citizens Advice Bureaux in England and Wales dealt with 7,420 new debt problems every working day in the year to June 2013.
Additionally, if you have a poor credit rating then you might have limited credit options – forcing you to take unsecured, quick cash loans which may not be right for your situation.
Saving: the benefits
On the other side of the coin, saving money to fund your purchases has very few problems and plenty of benefits. To begin with, the interest applied to your savings goes straight to your pocket and gives you extra money simply for investing your savings.
The amount of interest you earn will depend on the type of savings account you open so it’s important you research the different types. These include fixed rate, notice accounts and variable rate easy access accounts. The idea of compound interest is also something you need to consider. This is where the interest is paid on the total invested amount (your deposit and previous interest payments) at the end of each period rather than just the cash you’ve invested.
When looking for ways to save, you’ll want to find a savings account that’s right for you.
In general, savings accounts that allow you to access your funds at any time without penalties offer lower rates of interest than those that require you to leave your deposit untouched for a given length of time or give a certain amount of notice before making withdrawals.
Other alternatives include Individual Saving Accounts (ISAs) which allow you to earn interest tax-free. You’re restricted on how much you can place in ISAs over the tax year though so for those with larger savings pots a high-interest, specialist savings account is still important.