How you can save every month for a higher rate.
I’m a huge fan of monthly or “regular” savings accounts. They’re great for people putting money aside every month, and they also tend to have some of the highest interest rates!
Even a year ago, before rates dramatically fell, you could earn 5% on one of these accounts. Now the best ones are paying 2.75% – still a fair bit higher than the majority of savings accounts.
But these monthly savers are often misunderstood, especially when it comes to the amount of interest you’ll earn. So here’s an explainer to make sure you know how they work.
What is a regular savings account?
A regular savings account is designed for people saving some of their income every month rather than depositing a lump sum. Hence the name.
Often there are limits and restrictions, such as:
- You can typically only deposit around £250 to £300 every month
- You usually have to pay in a minimum each month
- You might not be able to make withdrawals
- Interest is paid annually
- The best account might be restricted to customers with current accounts
- The account closes after 12 months and the rate ends
How interest is calculated
The main area people get confused is the interest rate. For this example, let’s use an example interest rate at of 2.85%.
If you save £250 a month into the account, and therefore have £3,000 saved by the end of the year, you might expect to get 2.85% on that £3,000.
Actually you’ll only earn that interest on the cash saved each month. So the first £250 will have been saved for 12 months and earn the full 2.85% – a figure of £7.12
However the second £250 saved will only be in the account for 11 months. So you’ll earn 11 twelfths of 2.85% on £250 – which works out as £6.53.
The next £250 will be 10 twelfths, the next one 9 twelfths and so on. If you miss a month or pay less in that month, then that’ll also affect your earnings.
Now, if you paid in the maximum every month, you’d earn £46.11, which on the total £3,000 balance is effectively 1.54%.
I get why some people get angry about this – but you are earning that headline money on your monthly deposits.
The best regular savings accounts
There are fewer accounts available right now that beat the best easy-access rates but you’ll still get the highest interest rates in one of these accounts. Here’s my regularly updated list of what’s on offer.
Requiring a current account with the bank
- HSBC – 2.75% (£250 max a month)
- M&S – 2.75% (£250 max a month)
- First Direct – 2.75% (£250 max a month)*
- Lloyds – 1.5% (£250 max a month)
*First Direct is currently closed for new current accounts
Open to all customers
- Coventry Building Society – 1.55% variable (£500 max a month)
It’s always worth checking out local building societies too as they may have higher rates that are only accessible if you live locally.
Regular savings hacks
These regular savings accounts aren’t just for people building up a new savings pot. You can funnel other, lower-paid savings, into these accounts.
Drip feeding your savings
If you’ve a small lump sum you can gradually move money from one account into a regular savings account.
Say you have £3,000 already. The first thing to do is move it to the highest paying account or accounts you can find.
For the example here let’s assume it’s split 50/50 between a personal TSB Classic Plus earning 1.5% and joint TSB Classic Plus earning the same amount.
For the first six months of your regular saver, you’d move £250 from the personal account. Then when that was empty you’d move £250 from the joint account for the next six months.
This would earn you an additional a total of £67 in interest – £22 more than if you’d left it in the TSB accounts.
Using multiple regular savers for larger savings
You can use the same trick as above to drip feed deposits if you have a larger stash.
For example, at the time of writing, you could pay a total of £1,550 each month into the five accounts listed above. That’s enough for a pot worth £18,600.
With that kind of cash you’ll likely be getting just 1.16% interest on the bulk of the money, so moving your money to the various regular savers will boost your return.