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!
A few years ago, before rates dramatically fell, you could earn 5% on one of these accounts. After a long period of around 1%, the best ones are paying 3.3% – 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. Usually this transfer is made by a direct debit, set up when you open the account.
I’m a big fan as they encourage you to save a set amount every month, rather than ad hoc amounts as and when you have spare money.
How regular savers work
Often there are limits and restrictions, though this can vary depending on the account.
You’re limited to how much you can save in them
You can typically only deposit between £50 to £500 every month, with most actually having a cap of around £200.
You might also have to pay in a minimum each month, though that might not be much – usually £25 or £50.
The account normally closes after 12 months
The vast majority of regular saver accounts (Natwest/RBS’s option is an exception) last for just one year. Once the year is up you’ll be paid the interest and the account is closed with your money moved to a lower paying easy-access account.
Withdrawals can be limited
Some regular savers don’t allow withdrawals until the year is up, or have extra limits on them such as just two a year. If you do take money out, you might not be able to add it back in for that month.
The best accounts require current accounts
The highest paying regular savers are usually restricted to existing customers of the bank. Though you should be able to easily open a new current account with those banks to be eligible, there might be better paying options at other banks, for example a monthly reward or cashback.
How interest is calculated
The main area people get confused about is the interest rate. For this example, let’s use an example interest rate of 2.5%.
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 2.5% on that £3,000 – a total of £75.
However you don’t have £3,000 for the full year – you’re adding money incrementally. This means you’ll only earn interest on the cash held each month. So the first £250 will have been saved for 12 months and earn the full 2.5% – a figure of £6.25 over the year
In turn, the second £250 saved will only be in the account for 11 months. So you’ll earn 11 twelfths of 2.5% on £250 – which works out as £5.73 of interest.
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. If carried on you paying in the maximum every month, you’d earn £40 after a year.
If you calculated this £40 return on the total £3,000 balance it’s effectively 1.33% – just over half the advertised rate. This is why people get angry. But you are still earning that headline money on your monthly deposits.
And that “50% of the headline rate” is a handy shortcut if you want to find out how much you’ll make based on the annual balance saved. For a more accurate figure you can use the calculator on Money Saving Expert.
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 got a small lump sum you can gradually move money from one account into a regular savings account.
Say you have £2,400 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 all in a Chase bank account earning 1.5%. In a year this would earn you £36 of interest.
But if you then move it month by month (at £200 a time) to Nationwide’s regular saver account paying 2.5% you would earn a combined total of £49 in interest (£32 from Nationwide and £17 from Chase). That’s £13 more than if you’d left it in the Chase account.
Using multiple regular savers for larger savings
You’re not limited to just one regular saver, so 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 £825 each month into the five highest paying accounts (listed below) that earn more than you’d get with Chase. That’s enough for an existing pot worth £9,900.
Are regular savers worth it?
If you want an account that pushes you to save every month, earns decent interest and even make it harder for you to access the money for a year then they can’t be beaten. But if you’re just after better rates they might not be worth it.
Though you can get the best interest rates in regular savers, they are still relatively low at the moment. And combined with the limits on monthly deposits you won’t be making a fortune from using these.
As you’ll see from the table below you’re looking at £32 at best in a year. Compare that to putting the money in Chase at 1.5% and you’re actually only making £13 extra via the regular saver. Is that worth it?
I’d say if you already have the current accounts required then go for it, but otherwise prioritise other current account rewards and benefits.
But do keep an eye on improving rates and maybe even higher deposit limits. If these increase (and it’s likely they will) then the returns will be more worthwhile.
The best regular savings accounts
It doesn’t make sense to have a regular saver paying less than the the best easy-access accounts (currently 1.5%), but there are a handful which beat this, ranging from 2% to 3.3%. Here are the best ones at the time of writing, or check out my regularly updated list of what’s on offer.
|Bank||Rate||Monthly limit||Max interest in 12 months||Requires current account|
|Saffron Building Society||2%||£50||£6||No|
It’s always worth checking out your local building societies too as they may have higher rates that are only accessible if you live locally.