We all know that we should be putting aside some money in the form of savings to help us finance some of life’s great expenditures. For instance, you could save for a mortgage deposit, a new car, retirement, or even for future medical expenses. Having said that, not many people do save. Statistics show that on average, a person in the UK has £9,633.30 in savings with over 6.50% of people having no savings at all.
If you fall into the category of either those with low or no savings at all, don’t be discouraged because you can start your journey right this moment. There are many investment options out there from mutual funds to exchange-traded funds (ETFs) to mortgage-backed securities. However, some of them may be a little complex for you. To help jumpstart your savings and investment journey look at savings accounts and savings bonds. They are the simplest in structure and do not carry as much risk.
Savings bonds are often confused with savings accounts mainly because of their similarities in structure. However, the two have some differences worth looking at. Read on to learn a lot more about their structure and suitability for your needs.
What are Savings Bonds?
Savings bonds are fixed-term debt instruments issued by banks and building societies. The bond issuer promises you, the bondholder, a fixed rate of interest over the life of the bond and repayment of the principal either in part midway or in total at the end.
- Savings Bonds Terms
Savings bonds have different terms with some lasting up to 5 years and above. However, out there, you are likely to see most savings bonds having 1-to-2-year maturities. The longer the term of the bond, the higher the interest rate offered. This is because you are committing your money for a much longer period hence a higher risk-return tradeoff.
- Access to Principal
Typically, investing your money in a savings bond means tying yourself to the terms and conditions until the end of instrument term. However, not all savings bonds are structured that way. Some may allow you to access the amount invested during the term of the bond. For instance, you may come across savings bonds that allow you up to 3 withdrawals with the maximum per withdrawal set at 10% of the initial investment.
If your bond has a tiered interest, principal withdrawals could take you to a lower-tier meaning you will receive lower interest payments going forward based on the funds held in the bond. Instead of accessing your funds prematurely and unnecessarily losing on interest, consider applying for fast loans no guarantor to help you fix your cash flow needs. You get approved fast and can borrow up to £25,000.
- Additional Funds
Savings bonds do not allow for the addition of funds during the term of the instruments. The alternative option is to acquire another bond if available.
- Interest Rate Schedules
Compared to savings accounts, savings bonds pay a much higher interest rate. This is because the bond issuer is guaranteed of holding onto your funds for a specified time thus giving them certainty.
The interest rate may be fixed or tiered. Fixed interest rates don’t change over the life of the bond. However, tiered interest rates change depending on the amount of investment remaining in the bond following a withdrawal.
Depending on the structure of the bond, interest payments may be made monthly, annually or at the end of the bond term. If you depend on the bond interest payments to help you settle some expenses such as mortgage payments, it helps if you could prioritise your bills so that you don’t fall behind and muddy your credit score.
- Minimum Investment
Most savings bonds require a minimum of £1,000 to start investing. This means if you have lower amounts, you may have to start from a savings account and then build up to a savings bond.
At the end of the period, the bond issuer will pay back your money-principal plus accrued interest, into the funding account where it came from. However, you can also have alternative arrangements by signing a new mandate to have your funds transferred to a low-interest savings account pending your withdrawal. You could also roll it over to another instrument.
What are Savings Accounts?
Savings accounts are interest-bearing deposit accounts typically offered by retail banking institutions. Their features vary depending on the institution, but most of them have withdrawal restrictions and do not offer check facilities or even debit cards. These are not punitive measures, rather structures to help you maintain the savings discipline.
Some banks include individual savings accounts (ISAs) as part of the savings accounts portfolio. An ISA is a tax-free retirement account that is dedicated to helping you build your nest egg.
- Term Limits
Unlike savings bonds, savings accounts do not have term limits. You can invest for as long as you want. Your money grows with every deposit and interest rate payment.
- Interest Rates
Typically, savings accounts pay a lower interest rate compared to savings bonds. As opposed to fixed rates, the interest rates on savings bonds are variable. They change depending on a couple of factors including the prevailing rates in the economy and the number of withdrawals you make. The more withdrawals you make the lower the interest rate offered.
To help you avoid making withdrawals even so often, you can instead leverage emergency loans to help sort out your pressing needs. Most crisis loans the UK are processed within 24 hours and you can borrow anywhere from £500 to £25,000.
- Access to Funds
You can access your funds at any time although some savings accounts may limit the number of withdrawals to once or twice per month. Frequent withdrawals may attract an access penalty in some cases or even cause you to lose the interest accrued.
- Additional Funds
You can add funds at any time using mobile banking, online banking, telephone banking or through in-person deposits. This means you can boost your savings without having to wait for another instrument as is the case with savings bonds.
- Minimum Investment
Savings accounts can be opened with as little as £1. It is an excellent opportunity for beginners who are keen to start cultivating their savings habits. It is also appropriate for regular savers because of the allowance for additional top-ups at any time. You can even set up a standing order for automatic deductions.
As an added benefit, holders of savings accounts can use them as collateral to access personal credit facilities such as loans for pensioners. This is especially convenient if you have bad credit and cannot be approved for conventional loans.
Savings bonds and savings accounts are excellent saving opportunities to help you put aside some money for a rainy day or even for retirement. Though they are often put in the same category there are some major differences between them. The main areas of departure are term limits, minimum deposits, additional deposits or top-ups, interest rate differentials and access to invested funds.
Before you commit your funds into either a savings account or a savings bond, read through the features outlined by the issuer including the prospectuses and then assess yourself as per your priorities and preferences.