With the Bank of England base rate now at 2%, some will probably be wondering whether saving is even worth their while. Not only are potential returns dwindling by the minute, but after the latest rate cut, you could switch your savings to what you think is a better account only to find your new rate get slashed soon after too.
But according to latest statistics from National Savings and Investments (NS&I), despite the economic downturn, those already in a regular savings habit have managed to maintain savings levels, with amounts averaging 6.4% of income during both summer and autumn 2008.
That said, NS&I also found an alarming 53% of people do not save regularly, with 21% of people failing to save at all.
Now that the credit crunch is in full swing, perhaps it's time to take stock of your finances and - despite the fact that Darling and Co. want you to be out there spending - start saving now.
Start saving now
As well as those good old instant access staples, one product that encourages saving while giving you a great return on your investment is a regular savings account.
Regular savings became big business a few years ago when eye-catching rates of 8% and over lured many savers to start investing.
The accounts offer a fixed rate of interest, usually over a period of about a year. You pay into the account each month by standing order, and interest is paid on maturity. You can also start small - usually from £25, building up your savings pot gradually over the year.
Rewarding regular savings
As you get a fixed rate throughout your investment period, you won't need to worry about interest rate fluctuations. So, even if interest rates are cut again, you can rest easy in the knowledge that your savings rate won't change with it.
The best account at the moment that doesn't require an existing relationship is the Halifax Regular Saver, which pays 6% AER for one year on savings from £25 to £500 a month. You can vary the amount you save each month, although you are not allowed to miss any payments, or the account will be closed.
Alternatively, the Monthly Savings account from Barclays also pays 6% on savings from £20 to £250 a month, and allows withdrawals. However, you'll receive the lower rate of 3.03% in any month where you decide to dip into your savings, and you must have a current account with Barclays in order to qualify.
Personally, I think it's a good thing that you can't get access to your money within the investment period, as this encourages saving. If you start small, with say £25 a month, you're unlikely to miss the money coming out of your account, but will have accumulated a £300 pot by the end of the year -- plus of course the juicy interest on top.
Existing HSBC or Derbyshire BS customers can enjoy even better returns, with both institutions paying 8% on their regular savers. However, unlike the Halifax account, restrictions apply, and you have to be a HSBC Current Account Advance, Premier, Plus or Passport customer, or a Derbyshire customer for over ten years to qualify for the 8% rate.
Alternatively, you can earn 6.5% if you switch your current account to . But again, there are catches: you have to pay in £500 a month, and you can only earn the headline rate on the first £2,500 in your account. Read this article for more details.
Cautionary calculations
One query several financial agony aunts have tackled with regards to regular savings is how interest is calculated. Regular savings accounts were surrounded by controversy when they first started maturing, as many complainants believed they only received a fraction of the interest they were entitled to.
Many who invested, say £3,000 in an account paying 10% over a 12 month term (paying in the maximum of £250 a month) mistakenly expected a gross return of £300.
But, in order to gain the full £300 interest, it would require £3,000 to be invested from the start of the year. As you can only accumulate the full £3,000 in the last month, and can only earn interest on money in the account, the average balance across the 12 month period is £1,500, not £3,000. Therefore a return of about £150, not £300, should be expected.
In light of this, the next question to answer is: are regular savings accounts a good idea? The answer depends on your situation.
If you already have a lump sum to invest, you'd be better off putting the whole lot in an instant access account or fixed rate bond. For example, as a basic taxpayer, you'd earn £144 a year in interest with the current market instant access leader, Tesco's Internet Saver, which pays 6% AER, while you'd only earn £77.44 in interest if you were to drip feed this money into a 6% regular savings account.
There are also restrictions on the maximum amount you can invest each month. Halifax imposes a limit of £500 a month on its regular saver, with many similar accounts only allowing a maximum of £250 each month. Those with more to invest may be put off by this restriction.
If, on the other hand you plan to put in a regular amount from, say, your wages, a regular saver is an ideal way to save money, with a guaranteed rate of interest.
I have opened a couple of regular savers in the past, which have helped me save for a holiday and pay off my dreaded student overdraft very successfully. With instant access rates being cut all the time, and bond rates also shrinking, perhaps it's time to think outside of the traditional savings box and opt for a regular saver.
After all, if you know the facts and take advantage of the perks these accounts offer, regular saving can prove extremely rewarding.
