Savings, Targets, and How To Calculate Interest

Why Is Setting a Saving Target Important?

One thing that is commonly accepted is that beginning a saving habit is the hardest part.

Having a target or goal, is a good way to build a habit for those new to saving. You might not be able to think about retirement right now, or longer-term goals, but saving for a holiday, or even for Christmas, might seem more achievable as the goal is within reach. The key here is that once you have achieved your short-term goal, you should continue to put that money into savings, set yourself a new goal, and maintain the habit.

At The Cumberland we have two regular saver accounts that may be useful to get you started. The first of these is a one-year term account, and the second is for a first home saver. These are both variable interest accounts and the full details can be found on the link above.

Once you have a saving habit established, you will become more confident that you are able to successfully save regularly. A well-planned saving target backed up by an established saving habit or commitment is a really good way of preparing for larger purchases, home renovations, or financial security.

How To Set Realistic Saving Goals

Each of us are motivated by different things but when it comes to saving, most of the motivation comes from the thing that you are saving for. Whether it is something pleasurable like a holiday, or a security related goal such as an emergency fund or retirement pot, setting a goal that you really want to achieve is the first step toward becoming a saver.

SMART objectives are a great way to test your goal:

Specific: Are you saving for something particular?

Measurable: Can you pinpoint the value that you will need to save in order to reach your goal?

Achievable: Is your goal achievable? Can you realistically afford to save x amount of money for x amount of time towards this goal?

Relevant: Is the object of your goal something that you really need or want?

Time Bound: Endless goals will offer an excuse for you to miss a month or two. Having a timeframe will enable you to commit to regular saving.

An example of a SMART objective might be saving for a new car:

The goal is ‘specific’ in that you’ve researched cars and know the range of cars that you would consider purchasing and how much they cost i.e. you’re not just saving for ‘any’ car.

It’s ‘measurable’ because your research has given you a price range and therefore a savings target.

‘Achievable’ in this case might mean that you have decided that you can afford to save £100/month for three years.

The goal is ‘relevant’ because you have chosen a range of car that you could afford to maintain, insure and run once purchased.

The objective is ‘time bound’ because you have decided that you can commit to saving for this goal for the next three years.

What Are The Types of Savings Account Offered By The Cumberland?

Instant Access:

These accounts are a useful way to save for spontaneous treats or regular expenditure. We have a variety of accounts from traditional branch-based products to accounts that you can manage online.

In return for allowing instant access, interest rates are usually lower on these accounts than those of less accessible accounts, where you can access your money less frequently, or may be charged for withdrawals.

Fixed Rate:

Fixed rate accounts provide the certainty that the rate on your account will not change during the fixed term period of the account. They generally offer higher interest rates than more accessible accounts.

Fixed accounts are geared towards customers who know that they will not need access to their money until their account matures and are a way of saving for longer-term goals.

While access to these accounts is sometimes possible either infrequently or with a charge, they are not as readily accessible as ‘instant access’ accounts.

ISA:

A Cash ISA account has a special tax status to ensure you incur no tax liability on the interest earned.

Further information about ISA accounts and your annual ISA allowance can be found in our articles ‘What is a Cash ISA?’ and ‘Can you have more than one ISA account?’

Regular:

Regular savings accounts are a way of developing a savings habit and making timely use of anything you may be able to save. We offer a more traditional regular saver alongside a version for those saving for their first home. This can be a useful way for prospective first-time buyers to develop a habit of making regular monthly payments.

Notice:

Notice accounts are a good way to save for the future whilst knowing that should circumstances or plans change you can still access your funds relatively quickly. Should you need to access your funds then you would need to give us a notice period as agreed in your account details.

Children’s:

Whether it’s saving up pocket money for a rainy day or saving for your child’s future – we offer a variety of children’s savings accounts to help you with their savings goals.

Business:

Our business savings accounts provide different features and interest rates depending on how much the business wishes to invest and the type of access that is required.

How To Calculate Interest On Your Savings

When calculating the interest to be gained on your savings, there are two forms of interest to be aware of:

Simple interest is paid on your original balance. You start with the balance and then multiply that by the rate of interest and time period. For example, an opening balance of £1,000 in an account paying interest at 4% AER, assuming that no additional money was added in or taken out, would result in an account balance of £1,040 at the end of a 12 month term.

Compound interest takes place when the interest earned on your money, also begins to accrue interest. Using the above example, if you leave your £1,040 in the same account for a second year, in year two you would gain interest on the full amount (not just on the £1,000 that you started with). At the end of the second year, the account balance would be £1,081.60. (Assuming that the interest rate remained the same and that no additional money was added in or taken out.)

Online savings calculators allow you to enter savings amounts, time periods and interest rates. The Money Helper website has one such calculator.

When reviewing savings accounts, you might also come across the following terms:

AER stands for annual equivalent rate. This rate shows how much interest you’ll earn if you keep your savings in the account for a full year. UK banks and building societies display their rates as AER which makes it easier for the consumer to compare accounts.

Gross is the rate of interest paid before any tax (where applicable) has been deducted.

UK taxpayers have a personal savings allowance. Our online article explains this in more detail. Your personal savings allowance determines how much tax-free interest you can earn on your savings.

How Does Inflation Affect Your Savings?

The rate of inflation is the rate at which the price of goods and services are increasing.

You should consider the rate of inflation when deciding whether a savings account meets your long-term goals. If you are saving money into an account which has an interest rate less than the rate of inflation, then the real value of your savings will decrease i.e. your money will be able to buy you less in the future than it does now.

Strategies To Reach Your Savings Goals Quicker

• Automate savings through setting up a direct debit. You can set up a regular monthly payment from your current account to your savings account, meaning the money is safely stored away before you’re tempted to spend it!

• Cut out any unnecessary expenses. Have you signed up to a free trial and forgot to cancel the subscription? Are you paying for a streaming service you barely use? Those subscriptions can add up. From gym memberships to digital subscriptions, you should make it a habit to check your direct debits and recurring Paypal payments for any outgoings that are no longer needed.

• Explore your account options. Once you’ve established your goal and the amount of money that you can reasonably add to savings, you should then take the time to explore the pros and cons of various savings accounts until you find the account that best fits your needs.

• If you’re eligible to pay tax on your savings, then ISA accounts might be a good way to save money tax-free.