Whatever kind of budget we live on, we all know the importance of saving money, yet it can still be difficult to find extra cash for a savings account. These days, saving account interest rates are so low that there is little incentive for people to actively put money away for a rainy day. The accounts with better savings rates are often ‘locked’ or ‘fixed term’ which means you can’t access the money for a period of time, even if you need it. For those with spare cash, this might be a reasonable way to save money, but for people saving on a tight budget, an emergency expense could cause huge financial issues if their savings are inaccessible.
While there are several ways to save, premium bonds often get overlooked. You may have heard the term ‘premium bonds’ through your parents, or even grandparents who may have gifted you premium bonds on your birthday and at Christmas. As a child, it may have seemed like a boring present because you couldn’t play with it – or even see it. But in modern terms, gifting a premium bond is a bit like giving someone a scratch card. You are giving them the chance to win a bit of money, with no personal financial loss. Even though you may have never won anything with your premium bonds, you can always withdraw the cash to buy yourself something nice instead.
Premium bonds are an investment with National Savings & Investment and each month you have the chance to win cash in a prize draw. The prizes range from £25 to £1 million, and the more bonds you have, the more chances you have of winning. Each bond costs £1 but you have to buy a minimum of 25 bonds, so you need at least £25 to get started. Your money is protected so you won’t suffer any financial losses and you can sell the bonds to have the cash put in your bank account at any time and at no cost.
Premium bonds are an easy way to save and a great example of ‘out of sight, out of mind’ saving (for those whose temptation may get the better of them). Your savings are protected, and you can sell the premium bonds to get access to your cash at any time. If you do win, you can choose to have the funds deposited into your bank account or reinvested in premium bonds to increase your chances of winning.
As current savings accounts have an interest rate of around 0.5%, it may be worth investing in premium bonds instead. NS&I state their premium bond interest rate as 1%, although they call it an ‘annual prize fund rate’ as it’s not guaranteed interest.
The minimum you can pay in is £25 so almost anyone can start saving with premium bonds, and the maximum you can pay in is £50,000 so your money will always be safe under the Financial Services Compensation Scheme (FSCS).
While the concept of a prize draw sounds like a lottery, premium bonds are viewed as a financial investment. They don’t carry the same risks as gambling because you don’t lose your money if you don’t win, unlike the lottery, investment trading or even normal betting sites.
At the moment, saving account interest rates are at all time low (in part due to Covid-19) so there’s little to be gained from putting your money in a savings account compared to putting your money in premium bonds. However, if the interest rates start to pick up and rise to over 1%, then a savings account would be a more steady and guaranteed way of earning interest.
Apart from premium bonds, there are alternatives to your typical savings account. If you are saving for your first house, you might want to look at a Lifetime ISA (LISA) where you can earn a 25% bonus from the government on everything you save up to £4000. This could work out to an extra £1000 each year!
You can open a LISA if you are between the ages of 18 and 39, but you can only access the money for 3 reasons:
If you withdraw the cash for any other reason, you will have to pay a penalty charge so you should only save money in a LISA if you plan to use it for the reasons listed above. There are other types of ISAs and locked savings accounts which may also have a slightly higher savings rate so it’s worth looking into those too.
If you know you can be tempted to dip into your savings account, then a locked savings account might be a good alternative for you as you won’t be able to access the cash so quickly. Even premium bonds can reduce the ease of spending your savings as you would need to log in to your account with NS&I and sell your bonds to access the money. For this reason, they can help you save because the process of withdrawing the cash gives you enough time to think through your impulse purchase, while still being accessible for emergency bills.
Otherwise, there’s nothing wrong with a good old piggy bank for your spare change and notes. While cash usage might be in decline, it’s still a valid tender and many people find saving their change an easy way to rack up a nice cash fund. You won’t earn any interest from your savings but finding a good way to save money means more than just earning a high interest rate.
There are so many benefits of having savings and premium bonds are a good way to save money. But ultimately, the best way to save is the way that works for you.
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