Savings terms you need to know

There's never been a more important time to get good at saving.

In today's economy, putting money aside for the future is the best way to ensure you'll be able to get what you really, really want in life.

But, like everything, saving lingo can be a little difficult to understand sometimes.

So, here’s everything you need to know about those tricky savings terms.

What you need to know

Interest

If the banks called interest ‘free money’, we’d be biting their hands off. Unfortunately, they don’t – but that’s basically what it is. The interest rates offered by banks are influenced by THE bank – the Bank of England – which sets the base rate. Interest rates are infamously low at the moment because the base rate is 0.25% – it’s been taken down a peg or three since 2008. You’ll see interest advertised as AER (annual equivalent rate) which simply makes it easier to compare accounts.

 

Compounding

As interest accrues on your savings, it compounds. Einstein thought that compounding was the eighth wonder of the world, apparently. It means extra free money for savers because you get paid interest on your interest. You can maximise compound interest by starting as early as you can, and leaving the money to grow for as long as possible. You can read more about the magic of compounding here.

 

Inflation

Sadly, as you’re busy saving, the world is busy getting more expensive, thanks to inflation. Depressing right? Inflation is the reason pay rises exist and savings earn interest – so your money keeps pace with how much everything costs. If you’re interested in inflation, there’s more info here.

 

Tax

While we’re on depressing topics, don’t forget tax. Nothing is safe from tax, including savings. However, if you’re a basic-rate taxpayer the first £1,000 you earn in interest on your cash savings each year is tax free. As an example, £50,000 savings earning 2% interest equals to £1,000 interest in a year – so your money is safe until then. If you’re a higher-rate taxpayer (40%) your allowance is £500 and if you pay 45% tax then all of your savings interest is taxed.