When interest rates rise, it will have an impact on banks. This is because the Bank of England lends money to banks and so when they change the interest rate that they lend at, it has a knock-on effect to all other banks, building societies and financial institutions. This means that individuals will all be affected if they hold a loan or savings. The impact on loans tends to be more immediate because banks do not want to lose out on profits and so if it is more expensive for them to borrow money, they will immediately pass those costs on to people that borrow from them and put up their variable interest rates on loans. For savings the impact tends to be slower.
Savings Interest Changes
Savings account interest tends to be slower to respond to rate changes. This is because banks and building societies are paying out rather than receiving money from you and therefore you having savings with them costs them money. They will not want to pay you more interest than necessary. Often it takes one place upping their rates to cause others to have to so that they can compete with them and they may all try to hold out for as long as possible to make sure that they can make the highest profits they can before upping their rates. New rates are not always well advertised either so you may need to do some research if you are looking to open a new savings account to put your money into.
Types of Savings
It is good to have an understanding of the different types of savings accounts so that you can pick the best one for you. If rates are rising, then it could be good to save more money but you want to make sure that you put it into the best place. You will find that there are accounts which have low rates that are instant access, which means that you can get your money as soon as you need it. This is great if you want some money for emergencies or if you run out before you get paid. However, if you have an excess of money then you might want to put some into a savings account that pays more interest where you have to leave it in there for a length of time. For example, you will have the option of taking out a bond, which will give you a fixed rate of interest as long as you keep your money in for at least a year. The longer you keep the money in, the more interest you will be able to get. It is a gamble though, as if you tie your money up for three years and interest rates rise rapidly you may actually find you could have done better putting it elsewhere. You may also need the money and not be able to get it. A notice account can be a better solution for some people as you can draw the money out but only after a certain amount of time; perhaps between 30 and 90 days, depending on the terms of the specific account. These will also pay more interest than an instant access account, so could be worth looking at.
Advantages of Saving
There are many advantages to saving and so it is worth doing. If you suddenly need money and you have savings, it means that you will not need to borrow money but you will be able to take some money from those savings instead. This can save you a lot of money because loans are really expensive. There is a peace of mind that goes along with having savings that will help you to feel a lot more confident that if anything happens where you need money, it will be there to help you. There is a fun factor, that if you want a holiday or a treat, then you can use some of your savings for that. Of course, if you spend your savings, then you will need to replace them, but this can be pretty easy to do if you have a monthly payment going from your current account to your savings account each month, on the day that you are paid. Your savings will easily build up and you will have money available when you need it. Even if it is just a small amount each month, you can always put extra chunks of money in the account if you have extra.
Disadvantages of Saving
Savings interest is never normally as high as inflation. Inflation is the rate that prices are increasing and so if savings interest is lower, it means that you will be losing value on the money that you have. If you spend the money today, you may get more items for it, than if you leave it in the bank for a few years and spend it then, as inflation is likely to go up more than the interest rate. However, if you spend the money then you may just use up the items and have nothing to show for the money. So, if you buy a meal out, toys that children grow out of and things like this, then you may not get any more value from the money. Obviously, it depends on what you are buying and how valuable those items or experiences are to you or the person that you give it to. Finding a better rate of interest and getting a balance between saving and spending can really help to give you the best of both.
