1.1 An Overview Of Savings Accounts

By Author: Bonny Kominek
Total Articles: 32
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Savings accounts are designed to offer a safe place to keep money that you do not need to immediately or frequently access. Savings accounts traditionally offer a higher rate of interest than current or checking accounts can offer. There are savings accounts designed to offer instant access to money, but these tend to offer less interest than those accounts where your money is tied up for a while; that is, those accounts where you have to give the bank notice before taking the money back out again. In general, the longer you tie your money up, the higher the interest rate you should expect to receive from the bank for doing so.

The reason that a higher rate of interest can be offered on a savings account is that the bank or building society takes advantage of the accumulated money deposited in savings accounts to fund various types of commercial loans. The bank charges a profitable rate of interest for granting these loans (i.e. more than the interest paid to savers). The banks also use money accumulated in checking accounts to fund investment activity, but cannot commit such a high proportion of this source of cash, ...
... as sufficient reserves must be held to allow customers access to withdraw their money on request.

This investment activity funded in part by savings accounts should allow the bank to function as a profitable business, making enough money to prosper while still being able to afford to pay sufficient interest on savings accounts to attract enough individuals to deposit money in these accounts.

The business model outlined above has been strained in the recent years of financial turbulence and hardship. The base rate of interest, which is set by the Governor of the Bank of England, has been at a record low of 0.5% for the last 12 months. This low base rate has affected both the rates of interest offered to individual savers, and the rate at which banks loan money to each other.

One of the main reasons that the Bank of England base rate has been set so low is to do with controlling inflation in the economy ? the target level for inflation is 2% per year. Interest rates have a key role to play in attempts to control inflation, in what is a complicated process of number crunching and educated guessing.

The Bank of England is also concerned with maintaining reasonable growth in the economy, and in times of economic downturn like the currently prevailing conditions, it is seen that high interest rates can encourage people to save rather than spend money. In general, it is hoped that people will spend money to bolster the economy, and will be encouraged to do so if low levels of interest on offer.

However, there are still some opportunities for worthwhile saving available. The business opportunities still available to banks in terms of lending ? despite the recent recession ? mean that there are currently savings accounts on offer that incentivise normal people to save. Alliance and Leicester, for example, currently offer up to 3.75% interest per year on fixed rate bonds savings accounts; quite significantly more than the 0.5% Bank of England base rate.

Financial products are no different to non-financial products these days, in the respect that one of the easiest ways to shop around is online. Price comparison sites are always a good place to start to get an overview of the savings accounts on offer from the high street lenders, as well as checking the sites of individual banks and building societies.

from the banks and building societies to potential savers. Alliance and Leicester, for example,

to have a look around. Try looking at price comparison websites to get an idea of the range of

Bonny Kominek is the author of this article. Alliance