Best
Savings Rates

Advice, help, information and guidance on savings, interest rates, and savings tax advice.

Advice, help, information and guidance on savings, interest rates, and savings tax advice.

OK
- we've looked at simple interest, which I think you will agree hardly sets
the pulses racing, even when combined with the **best savings rates** you can
find. If you really want to be wealthy, or even just make your money work
harder for you, then you have to combine two things. First, make compounding
work for you, and secondly ( and this is the hard part for most people) you
have to be disciplined in your saving. Just as an aside, one of the
questions I am often asked as a trader and investor is " what is the
difference between saving and investing?". The answer is with saving you
generally get back all your capital plus interest, with investing you often
don't, although I have come across many people with so called 'savings plans' which
are losing money ( I had one myself!) - so it's a very fine line, and often
blurred at the edges. As we shall see, there are high risk savings and low
risk savings. Risk and reward, as in trading, go hand in hand even in the
supposedly low risk market of 'savings'.

Compound interest is actually very easy to understand. Remember in the previous example we removed our annual interest each year, so earned the same amount of interest for each 12 month period. Compounding interest is like the wind under the wings of a jet. The plane starts to take off slowly down the runway, but as it picks up speed so the wind lifts the wings and it takes off, rising higher and higher in a steep upwards curve. In a similar way, compound interest will lift your savings, faster and faster the longer your leave them in place.

So to go back to our savings, with compound interest, we simply leave the interest we've earned and add it to our capital each year, so our initial capital or principal( P) is growing every year. Because our principal is growing, so the amount of interest we earn each year grows as well. Let's take our simple interest example from the previous page and see what happens we when use compound interest using 5% interest rates:

Year |
Simple Interest |
Compound Interest |
||

Principal | Interest | Principal | Interest | |

1 | 1,000 | 50 | 1,000 | 50 |

2 | 1,000 | 50 | 1,050 | 52.50 |

3 | 1,000 | 50 | 1,102.50 | 55.125 |

4 | 1,000 | 50 | 1,157.625 | 57.88125 |

5 | 1,000 | 50 | 1,215.50 | 60.775 |

6 | 1,000 | 50 | 1,276.275 | 63.8138 |

7 | 1,000 | 50 | 1,340.09 | 67.00 |

8 | 1,000 | 50 | 1,407.09 | 70.355 |

9 | 1,000 | 50 | 1,477.45 | 73.87 |

10 | 1,000 | 50 | 1,551.32 | 77.57 |

Total Principal + Interest Earned |
1,000 + 500 = 1,500 | 1,628.89 |

So having left your money to compound by adding the interest back into the capital each year, you have earned the glorious additional sum of £128.89 - hardly life changing is it? - or is it? In the above example we have managed to increase our return by 128.89/500 or almost 26% - a substantial amount however you measure success. Now let me give you two further examples which will really make the point, I hope, that saving is not just about finding the best savings rates, but having the discipline to leave your money to work for you.

I am going to assume you are 20 years old and have come into a windfall of £10,000 from a late and much beloved great aunt who has passed away recently. Option one would be to buy a car, option 2 a luxury holiday, and option 3 to save it ( how boring!!) - if you had the discipline to save it in a simple savings account paying 6% compound, and left it there until you were 60, here's how much it would be worth:

Period in decades |
Capital Value Compound Interest |
Capital ValueSimple Interest |

After 10 years | 17,908 | 16,000 |

After 20 years | 32,071 | 22,000 |

After 30 years | 57,434 | 28,000 |

After 40 years | 102,857 | 34,000 |

1028% increase in value |
340% increase |

A staggering return of 1028% on your original savings, just from the power of compound interest. Finally let me give you an example in US dollars which makes the point graphically.

If you have a child who has just been born, then I would suggest the graph alongside provides a powerful argument for saving 100 US dollars and leaving it there for them to enjoy their retirement or to pay for healthcare. By the age of 70, this tiny amount has increased in percentage terms alone by 10,000 % - a staggering amount from such a small sum. Such is the power of compound interest- ( in this case the interest rate was 7%).

Now let's take a look at AER, or annual equivalent rate - this is the
rate that is the official savings rate - so
whatever the **best savings rates uk **may be, you will need to
make sure you are comparing like with like, and to do this you need to
understand all about AER.

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