5 Reasons to keep a Separate Savings Account

Savings are an integral part of efficient money management. They represent security for the future. Savings reward the astute saver who researches the highest interest-bearing accounts, with dividends in the form of interest, which will compound over time to represent growth. It is generally far better to manage savings in a separate account to one’s checking account.

Savings accounts keep funds defined

When savings are kept in a separate account it clearly defines their purpose. A demarcation line is drawn between money kept on hand for monthly expenditure and money specifically set aside for savings. When funds are automatically paid into a savings account from monthly income there is no temptation to use the account for everyday spending.

Saving accounts reap carpet bagging opportunities.

The benefits of separate savings accounts are clearly demonstrated by the U.K. practice of carpet bagging, a term used to describe the windfalls which members of building societies receive when they convert into banks. With a savings deposit of around £100, windfalls are paid out in the form of shares to those who have the patience to leave savings in accounts which may convert at some point in the future.

The practice clearly demonstrates the advantage of having multiple savings accounts which can represent ten-fold increases in the amount held as savings deposits. Although there are far less carpet bagging opportunities available today, it is still worth investing the minimum required as savings in any building societies which remain independent.

Savings accounts pay interest

Although interest rates fail to keep pace with inflation currently, this is not always the case. Interest payments on savings can represent a safe form of income at times. Whilst rates are so low it pays to comparison shop for the best rates and be prepared to move one’s savings around. In the UK it is highly recommended that savers put the maximum allowed into a tax-free savings ISA each year to avoid unnecessary tax on interest paid on savings.

Savings accounts represent security

As long as the savings account chosen is insured by the government the money saved in a separate account is safe. Currently savings of £85,000 per person in one institution is guaranteed. It is certainly safer than hiding it under the mattress or the chicken coop. However, it is important to ensure that the amount of savings does not exceed the government-insured amount, and to split it between accounts if the limit is reached.

Savings accounts keep you from spending

Many savings accounts pay a higher rate of interest if one is prepared to invest the cash for a longer term. Notice is required to withdraw funds, which means that they are less accessible. Usually the interest rate offered is reduced if the funds are touched prior to the date of maturity. This is a good incentive for reluctant savers to stick with their savings intentions.

When savings are kept separate from regular funds it is easier to appreciate their steady growth. Knowing there is a separate nest egg put aside will often incentivise yet more savings. With interest rates so low though, it pays to never become complacent and regularly seek out the few accounts which pay higher than the average. Moving savings around takes advantage of the best available rates.