Saving Account Jargon Explained
You would think that savings accounts would be easy to understand. You simply put away some money and watch it accrue interest. Unfortunately, these days not every savings account is so simple to grasp.
This guide to the terms commonly used when describing savings accounts has been compiled to unravel financial jargon and help you understand how various accounts work.
If you don’t quite grasp the concept of interest, you will be lost when it comes to compound interest, tax and inflation. Interest is basically part of the profit that banks make from lending your cash out. So you put money in the bank and the bank charges people to borrow it and then the bank gives you a return in the form of interest payments. The more money you have in the bank, the more interest you will receive.
Compound interest is basically the interest accrued on your interest. If you took your interest out of your account and spent it, you would not benefit from savings that grow year on year. However, if you leave your interest in your savings account, just as with your balance it too starts to earn interest. So if you put £100 into an account and it earned £2 interest at the end of year one and you left the £2 in your account, the following year your interest would be based on the balance of £102. That year, you would earn £2.04 in interest. Obviously, it becomes more fruitful the more you invest and the higher your rate of interest.
Did you know you have to pay tax on the majority of savings accounts in the UK? Whether you pay tax depends on the type of account – for example, you do not have to pay tax on ISAs.
Inflation relates to what you can buy with your money and how it changes over time. You can see the rate of inflation based on grocery shopping. How much did your basket of food cost at the checkout a decade ago, as opposed to now?
If your interest rate is lower than the rate of inflation, your savings will actually be worth less in real terms. It is imperative you choose an account with an interest rate higher than the level of inflation if you want your money to grow.
A savings bond is basically just a type of savings account, but with some subtle differences. Sometimes they have a variable interest rate but more often than not it is fixed and usually they run for a set term, unlike a normal savings account.
Once you have grasped some of the basic terminology used to describe savings products, it is much easier to start looking for the best ones to suit your circumstances.
It’s important to understand the different ways to save before investing your money. You can compare savings at MoneySupermarket for the best deals that suit your circumstances, and the best rates of interest on your savings.
Article written by Lucy at Money Supermarket