RECORD low interest rates and the unpredictable stock market can make it hard to get a decent return on your money.
Here are some places to consider putting your hard-earned cash so you can build an effective savings or investing pot.
Households are suffering from paltry returns on their savings and most products struggle to beat the level of inflation.
This means you are effectively spending more on the cost of living, such as your bills, then what you are earning on your money.
The best easy access savings account rate is currently 0.65%, according to Moneyfacts.
You can earn 2% if you are willing to lock up your money for five years in a savings account.
Neither of these come anywhere close to beating the current inflation rate of 3.2% and there are warnings that this figure will get higher as the supply chain and energy crisis push up costs.
Any money earning below inflation is effectively in a negative return but as inflation rises, it becomes even harder to get a decent level of interest to match or beat the cost of your rising bills.
An alternative is investing, which puts your money to work in the stock markets either through a general investment account or Isa.
Here are some of your options.
Saving versus investing
Saving money generally refers to putting cash aside.
This could be in an easy access account where you can withdraw your money at any time or a fixed term account that locks your money away for one to five years and pays a higher rate depend on the length of the term.
A savings account will pay a fixed rate of interest but it can be hard to currently find deals that beat the rate of inflation.
There aren't usually any charges.
Your money is protected by the Financial Services Compensation Scheme (FSCS) up to £85,000 if the savings provider goes bust.
Investing puts your money to work on the stockmarket by investing in company stocks either directly through shares or with a fund manager.
There is more risk involved as the value of shares can go up and down but the returns tend to be higher than a savings account over the long term especially if you build a diversified portfolio.
Don't forget to factor in investing charges which can reduce your returns.
There is also FSCS protection if your investment provider goes bust but that doesn't cover the actual performance of your portfolio.
What to do before you start saving or investing money
It is important to make a plan so you are using your money effectively.
It may be worth opting for a savings account if you need access to your money over the next year or so.
But if you can wait then it may be worth investing as you could earn a higher return over the long-term.
Consider how much you can afford to save, what you need for your goals and how long it would take to reach it through saving or investing.
Experts also suggest having a rainy day fund of cash set aside for emergency of usually three months of expenses.
What to do with savings?
There are few choices when it comes to your savings.
You could open an easy access or fixed term savings account.
Everyone gets a personal savings allowance of £1,000 that they can earn in a year, £500 for higher rate taxpayers.
Find out how to find the best savings account for your money our guide, plus check out the tips below.
How to save £1,000
Some of the best savings accounts require a minimum deposit of £1,000.
So your £1,000 of cash could be used to access some of the best savings rates on the market.
It could also go towards your Isa or Lisa allowance.
How to save £5,000
A £5,000 sum could max out your £4,000 Lisa allowance and leave £1,000 to put into savings or to invest.
How to save £10,000
A £10,000 pot gets you halfway towards using your Isa allowance.
It is a lot of money to put away so make sure you have enough left for expenses.
Also consider the best use of such a large sum. Is it worth putting it in a savings account to earn a rate below inflation, or can you afford to invest in the stock market and aim for a higher return? You would need to be willing to stay invested for at least three to five years.
With all these figures, your best option will depend on your saving or investing goal and how long you are willing to wait.
The taxman also gives savers and investors a £20,000 individual savings account (Isa) allowance.
This is an allowance you can put into an Isa and earn any interest tax-free.
You could open a Cash Isa, a stocks and shares version or spread your allowance across both.
Find out more about how to find the best Cash Isa.
Should I get a Lifetime Isa?
Another form of Isa is a Lifetime Isa.
This lets anyone age 18 to 39 save money and earn a government bonus that can be put towards a house deposit or your retirement savings.
You can put up to £4,000 per year into a lifetime Isa but this comes out of your annual £20,000 allowance.
It can be a good way to focus on building a deposit for a house or to put money into a pension but it is worth comparing what rates are available elsewhere with products that let you save more money.
There is also an age limit on Lisas. You need to be aged 18 to 40 to open an account as they are aimed at those looking to get on a proeprty ladder or starting to build a pension pot.
Where should I put my money right now
This will depend on your goals.
If you can wait and don't mind taking some risks, then it may be worth investing.
Alternatively, if your aims are more short-term then you may be better off using a savings account.
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In both cases you can earn interest tax-free using an Isa.
If you need extra help it may be worth making a plan with a financial adivser.
You can find advisers near you using VouchedFor.
Choosing a savings account
A comparison website can help you find the best savings or Isa account.
Compare deals based on rates and also how much you can deposit and any withdrawal penalties.
It is also worth checking if your current account provider offers exclusive rates to customers.
Which savings accounts can beat inflation?
With the Bank of England base rate at record lows of 0.1%, there is little incentive for banks to offer attractive savings rates.
As of September 2021, there areno savings accounts that beat inflation, according to Moneyfacts data.
Providers can currently access money cheaply on the wholesale markets so they don't really need cash deposits.
The best savings account rate is currently 2% on a five-year fix.
Inflation is predicted to hit 3.3% next year so it is also looking unlikely that savings rates will rise above inflation anytime soon.
Which are the best savings providers
The best savings provider will depend on your needs.
Don't just look for the best rate but also consider how soon you need to access your money and how easily you can make withdrawals.
Look beyond your current provider and high street banks as some of the best deals are offered by challenger or smaller brands.
Some providers may have snazzy apps but others may require you to make withdrawals in-branch or on the phone.
Which are the worst savings providers
High street banks tend to offer some of the worst savings rates so it is important to shop around.
Look out for tricks such as bonus rates that reduce after a certain period.
Also check reviews and ratings from independent bodies such as Which and Defaqto, which rank factors including customers service and product transparency.
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