Savings account basics

What is a savings account?

A savings account can help you to achieve your goals. It’s somewhere you can put your money so it can grow in value. Each savings account will offer a rate of interest, which is how much a provider will pay savers to hold their money with them.

Should I save or invest?

Saving tends to be for the short term, whereas investing is better suited to long term goals. Investments go up and down in value which means you may not get back what you put in, particularly when investing over a short time period. So if you know you’ll need access to the money within five years it’s best to keep it as cash.

But while cash savings don’t go down, they’re not risk free. The value of cash savings often struggles to keep up with rising prices, commonly known as inflation - if your interest rate is lower than the rate of inflation you can lose money in real terms, particularly over a longer period of time.

More on whether you should save or invest

What is an emergency fund and how to build one?

An emergency fund is there to help cover unexpected costs. It could be things like a broken boiler or losing your job. It’s important that you have cash to cover these expenses, because borrowing money to pay for them could put your finances in disarray.

It’s sensible to keep your emergency fund in an instant or easy access account, so you can get your hands on the money quickly.

How much should I save?

Everyone needs savings. But each person is different and the amount you’ll need to save will be unique to you. It will depend largely on your goals and circumstances.

We think you should keep at least three to six months’ worth of living expenses as your emergency fund if you’re still working. If you’re retired, you should consider keeping one to three years’ worth. It’s higher for retirees as it may be harder to rebuild your emergency pot if you’re not working and need to dip into it.

Find out more about how much cash you should hold

Why you may want to save even more

If you’re saving for something specific, like a new car, holiday or a wedding, you’ll want to save more on top. It would be wise to separate this from your emergency fund, so you don’t end up eating into it. You’ll also have a clearer picture of how close you are to reaching your goals.

Which is the best type of savings account?

There are a number of different savings accounts and you should carefully consider each one to decide what is right for you. A great rate doesn’t necessarily make it the most suitable.

Generally speaking, the rate you receive will be balanced by the amount of flexibility you get. If you need to be able to get your hands on your money quickly, you’ll get a lower rate. But if you’re happy to lock it away for a set period of time, you’ll normally get a better return.

This is because banks and building societies will lend your savings out to people for things such as loans and mortgages. They make their money by lending money out at a higher rate than they pay to get it in. If you want to be able to access your money quickly, they will be more restricted in what they can do with it. But if you’re happy to give it to them for an agreed period of time, they have more options at their disposal.

Depending on your goals, you may want to use more than one type of savings account. Here are the main types of savings accounts:

Instant access and easy access savings accounts

Instant access accounts allow you to access your money immediately and for easy access accounts it’s usually one working day. In return for this flexibility, the rate is usually lower than other types of savings. These accounts normally pay a variable rate of interest, meaning it can go up or down at any time.

Some banks and building societies launch new products at competitive rates, but don’t raise rates for existing customers. This means many people are likely to be sat in old instant/easy access accounts paying very little.

Fixed term savings accounts (also called savings bonds)

You lock your money away for a set period of time, in return for a guaranteed rate of interest. Rates are typically higher on fixed term accounts, but you won’t usually be able to access your money until they end. Fixed terms normally run from as little as a few months up to five years, and typically the longer you fix for, the better the rate.

They pay a fixed rate of interest, so you know exactly what you’ll get for the duration of the product. This is especially beneficial when savings rates are falling in the market, as we saw in the first half of 2021. But on the other hand if rates were to rise you won’t benefit so you need to be sure the term is right for you before you open it.

Notice savings accounts

These are a sort of hybrid between instant access and fixed term accounts. You can access your money whenever you like, but you must give a period of notice to your provider before they pay it out.

You usually have a choice of notice period when you select the account, such as 30, 60 or 90 days. The longer the notice period, the higher the rate normally is. Notice accounts usually pay a variable interest rate, meaning it could change in the future.

Limited access accounts

You can access your money when you like, but only a certain number of times a year without incurring a charge. The charge is usually a number of days’ worth of interest and will differ across products and providers. These accounts usually pay a variable interest rate.

Regular savings accounts

You pay into it each month and will usually earn a high rate of interest. They can be a useful way of saving toward a specific goal, but the amount you can save each month is normally limited.

If you miss any payments you may not earn any interest for those months that you don’t pay in. Withdrawals may also be limited, or incur a penalty.

These accounts will typically run for a year and you’ll receive your interest at the end. They may then convert to another type of savings account, paying a much lower rate.

Active Savings offers a range of easy access and fixed term savings products from a range of bank and building societies all in one online account. There is no limit to the number of products you can choose, so you can mix and match to find what’s right for you.

This website is issued by Hargreaves Lansdown Asset Management Limited (company number 1896481), which is authorised and regulated by the Financial Conduct Authority with firm reference 115248.

The Active Savings service is provided by Hargreaves Lansdown Savings Limited (company number 8355960). Hargreaves Lansdown Savings Limited is authorised and regulated by the Financial Conduct Authority (firm reference number 915119). Hargreaves Lansdown Savings Limited is authorised by the Financial Conduct Authority under the Electronic Money Regulations 2011 with firm reference 901007 for the issuing of electronic money. Hargreaves Lansdown Asset Management Limited and Hargreaves Lansdown Savings Limited are subsidiaries of Hargreaves Lansdown plc (company number 2122142).