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Why you should care about the interest rate on your savings account 🐷

Why you should care about the interest rate on your savings account

Why you should care about the interest rate on your savings account –

Introduction πŸ‘‹

These days, it’s pretty common to have a savings account keep your money in. πŸ–

In 2017, it was estimated that 36.5 million adults in the UK held a savings account! (Statista 2022)

Whilst a lot of people have savings accounts, it’s really common for people to put their money in the account, and then forget about it. πŸ’­

Whilst this is better than having no savings at all, forgetting about your savings account could actually make you lose money! 😱

You should always keep an eye on the interest rate for your account, and consider switching accounts. πŸ”€

But why? πŸ€·β€β™€οΈ

Why should you care about the interest rate on your savings account?

Today we’re talking about why your interest rate is important, and why you should consider shopping around for savings accounts to switch to. πŸ’°

Disclaimer: This website provides information for guidance and educational purposes only. The Grown-Up School does not provide regulated financial advice. You can seek independent financial advice from a suitably qualified and regulated professional advisor. Check out our disclaimer policy for more information.

What is an interest rate?

What is interest? (easy explanation) πŸ“ˆ

To explain “interest” in a simple way –

Interest is basically “extra money to say thank you“.

When you add money into your savings account, the bank might pay you interest (e.g. Β£5 in “extra money” to say thank you!) (Banks “borrow” your savings money off you).

Lending money to the bank πŸ’°

If you decided to lend a stranger Β£100 of your hard-won money, would you want them to pay you just Β£100 back?

OR, would you want them to pay you a little bit extra to say thanks for the loan? πŸ™

This is what interest is! – Interest is basically “extra money to say thank you for a loan”

Instead of the stranger giving you your Β£100 back, instead you ask them to pay you Β£110 back – the Β£10 is “interest“, to say thank you for the loan. πŸ’Έ

When you put money into a savings account, the bank is technically borrowing that money off you, which is why they pay you interest!

Interest as a percentage πŸ€“

To make the word “interest” even more confusing though, interest is usually shown as a percentage (%).

For example, if you opened a savings account, they might tell you:

“We will pay you 1% in interest” or “Our interest rate is 1%”.

When it’d be SO much easier to understand if they said:

“If you put Β£100 into a savings account, we will pay Β£1 “extra money” to say thank you. In total you will then have Β£101.”

Why you should care about the interest rate on your savings account 🐷

1. You can make money πŸ’°

Interest rates are pretty low these days. ☹️

You might find yourself looking at “high” interest rates of just 1%, compared to low interest rates of 0.10%.

With such small differences in rates, why should you bother looking at different accounts?

Is there any point switching accounts for just a 0.9% difference? 😬

Yes!

Believe it or not, with interest rates, the slightest difference in rates can make you money.

Imagine you’re lucky enough to have saved up Β£10,000.

Compare these two scenarios – which would you prefer? πŸ€·β€β™€οΈ

  • Interest rate is 0.10% = Β£10 in interest
  • Interest rate is 1.0% = Β£100 in interest!

If you switched to the 1.0% account, you’ve just made Β£90 in free money, simply by switching accounts! πŸ”€

It gets crazier. 😱

Those gains get bigger, the more savings you have. πŸ‹οΈ

Imagine you are extremely lucky, and you’ve saved up Β£80,000.

Compare these two scenarios – which would you prefer? πŸ€·β€β™€οΈ

  • Interest rate is 0.10% = Β£80 in interest
  • Interest rate is 1.0% = Β£800 in interest!

If you switched to the 1.0% account, you’ve just made Β£720 in free money, simply by switching accounts! πŸ”€

The interest rate on your account can be the difference in getting a lot of free moneyor not much at all.

2. Inflation 🎈

What is inflation? (easy explanation)🎈

If inflation is high, your savings are worth less money. 😒

If inflation for the year rises by 5% and you DON’T earn any interest from the bank on your savings– this means you’re technically losing 5% of your savings.

Ideally, you want your bank account to either:

  • match inflation so you’re not losing money πŸ’Έ e.g. if inflation was 5%, get 5% interest
  • beat inflation so that you’re earning more money πŸ€‘ e.g. if inflation was 5%, get 7% interest

If inflation is high for your country right now, it’s really important to consider how much money you’re “losing”, by not getting paid interest for your bank accounts. πŸ’Έ

If you’re in the UK, Money Saving Expert compares hundreds of accounts and regularly publishes a list of savings accounts with the best interest rates here. ⬇️

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

You might notice however, that sometimes there aren’t any saving accounts that beat the current inflation rate. 🎈

This is why a lot of people invest in businesses instead, to try and make more money with some of their savings. πŸ“ˆ

3. Your bank can change the rate πŸ“Š

A lot of savings accounts let the bank change your interest rate whenever they want. πŸ€·β€β™€οΈ

This means that your account could’ve had an amazing saving rate when you first opened it…

BUT

as time goes on the bank might reduce the rate to something rubbish! πŸ“‰

This makes it really important to keep an eye on your interest rate, so you know when your bank isn’t paying you enough interest! πŸ‘€

4. There could be better deals out there πŸ‘€

There are loooads of savings account options available for you to choose from, and banks can get really competitive trying to win your money. πŸ†

This means that some banks will offer amazing deals to get your money into their savings accounts!

If you keep an eye on the interest rates available, you might be able to make your savings go further and make money, by getting a really good interest rate. πŸ’Έ

If you’re in the UK, Money Saving Expert compares hundreds of accounts and regularly publishes a list of savings accounts with the best interest rates here. ⬇️

https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/

Conclusion πŸ‘

So that’s it!

You should care about your savings interest rate because:

  • You can make money πŸ’°
  • Inflation can make your savings worth less, so it’s important to try and beat inflation with your account! 🎈
  • Your bank could change your rate to something rubbish πŸ“Š
  • There could be better deals out there πŸ‘€

If you know anyΒ friends or family membersΒ who might benefit from learning about savings account interest rates, share this post with them!

Finally, don’t forget to check out our similar articles below!

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