5 Things to Consider Before Opening a Savings Account

Saving for the future is the first step towards your long-term financial health. Not only will opening a savings account mean you have something stashed away in case of emergencies, but you also stand to make a significant return on your investment.

It can be difficult to part with your hard-earned money, especially if you don’t have much to invest. However, saving for the long term, no matter how small your payments, has many advantages, including more stability, less stress and an improved quality of life – especially in the later years. That said, it’s important to know who to trust with your savings, as well as how you can make the best return on your money.

To help you find the right saving strategy, here are five things to consider when opening a savings account.

1. You May Need to Pay Tax on Your Savings

In the United States, taxpayers are required to submit a 1099-iNT form to the IRS that details the amount of interest earned on savings accounts held over the previous year. In other words, if you live in the States, you will need to pay tax on the interest you earn, rather than your account balance. You can learn more about taxable savings in the US by clicking here.

If you live in the UK, however, you will be given a personal savings allowance of £1000 tax-free interest if you are taxed according to the basic rate (20%). If you pay the higher rate (40%), you will be given £500 tax-free free interest, whereas additional rate taxpayers (who pay 45%) will pay tax on all interest earned.

2. Banks and Credit Unions are NOT the Same

If you’re wondering where to invest your savings, you need to know the difference between banks and credit unions. The most obvious point to make is that a bank is a commercial business, while a credit union is typically a non-profit organization owned by its members, with the financial health of the community in mind.

The idea of a credit union is that it is mutually beneficial for its members, as there is no profit going to third-party shareholders. Credit unions are helpful to less well-off communities, as they provide an alternative to payday loans and provide a flexible savings option.

The benefit of saving with a credit union is that you can save small amounts weekly, monthly, or whenever you feel able to invest. Larger unions may also have online banking, meaning you can pay into your account online, whereas others are likely to be based in a community center or village hall.

It may sound like a riskier option than using a bank, but credit unions offer the same financial protection as traditional banks. The drawback is that some smaller credit unions will limit the amount you can save with them if they don’t have the resources to protect your investment.

If you think this might be the best option for you, here is a list of United States credit unions. Credit unions are also prevalent in the UK and other parts of the world.

3. There are Different Types of Savings Accounts

There are many different savings accounts available depending on where you live and how much you have to save. Here are just some of the options:

Dividends: Some savings accounts may offer a dividend rate rather than an interest rate, meaning the return on your investment will depend on how the institution profits that year. Dividend rates are most common in credit unions and typically vary between 1-8% of the amount saved, paid without tax deductions.

Cash ISAs: Exclusive to the UK residents, ISAs are savings accounts you don’t pay tax on, but there is a limit to how much you can save. How much you can invest will depend on where you live and your personal savings allowance in line with current tax rates.

Regular savings accounts: Traditional savings accounts opened with your bank which usually require you to deposit money every month, meaning savers will need to be disciplined and be able to keep paying into their account. The downside of using a regular savings account is that there may be a limit on the amount you can invest each month, and you may not be able to withdraw the money as and when you need it.

Fixed-rate bonds: Fixed-rate bonds are savings accounts that provide you with a fixed interest rate for a set period. It may be the best option for long-term cash investment but bear in mind that you won’t be able to access your money during the set bonds period.

4. Inflation Will Affect Your Savings

If you’re looking to save money, you need to be aware of how inflation will affect your savings. If you have a large sum of money to invest, but a low-interest rate, a fixed rate bond is highly recommended, particularly if that interest rate falls below the rate of inflation, as this means you will lose money in the long term.

Rather than using a regular savings account, you may want to consider a fixed rate savings bond to ensure you pay a guaranteed amount of interest for a set length of time. However, you may not be able to access your savings during the fixed term, so be sure you’re only investing money you can afford. If you’re looking for fixed-rate bonds in the UK, best-savings-rate.co.uk is an excellent resource.

5. You Don’t Need to Have $1000s to Save

You may not consider yourself financially stable enough to be saving money, but a small amount of money tucked away could make a real difference over time. Even if you’re only saving $10 a month, that’s $120 over the course of a year, and $600 in five years, or $630 with a 1% annual interest rate. Stashing away the few dollars you usually spend on takeout coffee could make a real difference to your long-term financial stability.