A cocktail in London each month could cost you £33,000

When did you last look at the interest rate of your savings account?

Putting money into a separate account to avoid spending it can be a great way to save for something specific – an emergency fund or Christmas shopping, perhaps.

If you want your money to work for you, though, then you need to shop for the best interest rates.

The information that could change your life

Misunderstanding annuities can cost you thousands, and the same is true with savings.

Interest rates on bank accounts may often seem low, but there are variations and a small increase can make a huge difference.

As an example, let’s say you have £1,000 and are putting away £100 a month. You have the choice of four accounts, each paying different rates of interest: 0.1%, 1%, 3% and 5%.

After 20 years:

The account paying 0.1% will have £25,262.81. Just £262.81 of this is from interest.

The account paying 1% will have £27,799.56, and £2,799.56 is from the interest.

The account paying 3% will have £34,733.03, with £9,733.03 from interest.

The account paying 5% will have £43,987.27, of which a bumper £18,987.27 is from interest

In all four scenarios you have put away a total of £25,000, but putting it in the right – or wrong – place can have a tremendous impact on the total amount of money you have. In the final example you would have almost doubled your money, without doing anything!

Knowing how to maximise your savings can help make life more comfortable, so you won’t be reliant on inheritance in retirement.

There’s no such thing as too small

Consider this example: A cocktail in London can set you back £20. Saving that each month for 40 years could be worth £32,777.71. 

If you are holding £10 in your hands you have two ways of looking at it: it can either be £10, which can be spent or saved, or it can be £10 that can grow over time and give you a higher sum later on.

The interest figures above show how quickly money can work for you, even by putting modest amounts away. Similarly, looking at opportunity cost can be staggering, and help us reconsider our attitude to money.

Let’s say you’re out with a friend. You have your debit or credit card and aren’t shopping with a purpose. Your first purchase comes as you walk past a smoothie shop and spend £4.50 on a drink.

As you continue around the shopping centre you decide to browse a clothes shop, and spend £10 on a new top.

Then you buy a DVD for £10 from the shop next door.

You leave the shop and realise it’s now lunchtime, so you find somewhere for a meal. That’s another £20.

Buying low-cost items can make us feel that we haven’t spent much, but it can quickly add up. Excluding travel costs, this shopping trip cost £44.50.

If you saved £44.50 every month for 20 years, you would have £19,108.60 – with £7,906.36 coming from interest.*

Of course, it’s important to enjoy your money, but instead of thinking “It’s only £20” we can think differently: “Can this money work for me?” or “An extra £20,000 in the future would help the children with tuition fees or get rid of the mortgage and leave us enough for a holiday.”

Putting money away is an excellent habit, and a little time to find the best rate can make a huge difference in the long run.

It’s the same with pensions

Just as the best rate on your cash savings can make a big difference, it’s important that your pension performs as well as it can, too. In fact, a 1% difference in charges could boost your fund by £25,000 over 20 years!

A poorly performing pension can cost you a lot of money over the years, especially if it also has high fees as is typical of older schemes. It’s possible that you already shop around for the best rates on your mortgage and credit cards, and your pension should be no different.

As it’s likely to be your main source of later life income, getting your pension on track is an important task.

Add new comment

Call 0800 304 7288 for a friendly chat about your pension

Important information

Figure based on 5% growth with compound interest calculated monthly and deposits increasing in line with annual inflation of 0.5%

All calculations have been made at The Calculator Site

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section: https://www.portafina.co.uk/whats-new

We are really looking forward to reading your comments. Before you start writing, please just remember that everything you write will be displayed publically – including your name. Not sure what sort of thing you can write, and what sort of things you should avoid? Please have a quick read of our social rules for guidance.

Back to top