Video Transcript – Savings Accounts

Savings accounts vary in terms of the level of access to your money. Some are anytime access so you can withdraw all your money at any time. In these accounts the interest rate is variable, so the bank has a unilateral right to change it from time to time without your consent (agreed by you by accepting the terms of the account). Others are fixed-rate accounts e.g., for 1 year or 2 years. The interest rate is fixed so the bank cannot change it for the duration of the contractual period. You are not allowed to withdraw any money during the relevant period. If you really need the money, (and provided the amount is less than £50,000) you can typically close the account early and then you pay a charge to the bank according to the terms of the contract, usually of 90 days of interest. So, if you close it early you will get back less money than you put in.

In the middle, there are flexible account that allow a number of withdrawals per month or per year or account that pay you a standard rate of interest if you make a withdrawal and a higher bonus rate of interest for every month during which you do not make any withdrawal. These terms are governed by the principle of freedom of contract, so bank can offer a wide range of deals and in choosing one you need to read carefully and understand the level of access to your money that each savings account gives you.

Obviously, if you know for sure there is an amount of money that you will not be needing for a period of time it makes sense to go for a fixed rate account as this will give you the highest rate of interest. But if there is a risk you might need some of the money, you should go for a more flexible option. Often the difference of rates between a fixed-rate and flexible access account is not very big and if the money you have available is only a few thousands pounds it may amount to a rather modest amount. For instance, if you have £10,000 and a fully accessible account with bonus for non-withdrawal gives you 4% variable interest (inclusive of bonus interest), while a fixed-rate gives you a 4.5% interest, the difference in the interest you will earn in a year (assuming the variable rate remains the same) will be £50. If locking your money away is stressful for you, it is good to weigh that stress against the benefit of the additional interest and make an informed decision

Video Transcript – Understanding compound interest

Remember every few months the interest gets capitalised and then interest is paid for it too. This makes the amount you owe grow exponentially. So, if you incur a debt of £1,000 at a rate of 40% and make no repayments, in 2 years the debt will be nearly £2,000. The precise calculation of compound interest is tricky (unless you are a maths geek) but there are many online websites that run it for you, like this one (it is in $ but this does not matter): https://www.calculatorsoup.com/calculators/financial/compound-interest-calculator.php.

This means that you must be careful with debt and avoid expensive debt such as overdrafts (apart from the interest free amount) and credit cards. If you have such debts, and you end up with some money in your hands it always makes sense first to repay the debts and then to start saving. So, first repay all unsecured debt (overdraft, personal loans, credit card balances), then save to have a safety cushion, then invest.