Regular savings accounts allow you to save small amounts of money on a regular basis. There’s normally a maximum amount you’re allowed to deposit each month and you may be penalised for missing deposits, helping you get into the savings habit and slowly but surely build your pot.
These accounts will almost always beat other savings accounts in a straight comparison of headline interest rates. However, it isn’t always that simple. Unfortunately, many people drawn in by these attractive rates are then left feeling short-changed by the amount of interest they eventually receive, as behind the disappointment is a lack of understanding over exactly how the accounts work.
The most common misconception when it comes to regular savings accounts is over how interest is applied. Many savers assume that the headline rate is paid on the full amount deposited after a year, when in reality it works a little differently.
The limit on the amounts that can be deposited each month means there’s a maximum amount of interest that can be earned, and because you’re not depositing a lump sum at the outset, the amount of interest you’ll actually earn will start off small before snowballing as your deposits increase. However, the overall amount can still be smaller than you may initially expect.
Let’s say you deposit £250 per month into an account that pays a headline rate of 6.5%. Sadly, it isn’t as straightforward as working out 6.5% of £3,000 (which would result in interest of £195). Instead, there are two factors that must be taken into account.
First, because interest is applied monthly, only a proportion of the annual interest rate is calculated each month. So, with the same headline rate of 6.5%, savers should probably expect to receive a rate of around 0.54% each month. And secondly, this rate of interest is only earned on the savings that are in the account at any given time.
So, in the first month, 0.54% interest is calculated on the first payment of £250. In the second month, 0.54% interest is earned on the £500 that has now been contributed in total, plus the interest already accrued, and so on. It is only when the final payment is made in the 12th month that the full £3,000 will actually be earning interest. This means that, when this is worked out fully over the 12-month term, you’re looking at interest of around £107, rather than the £195 you may have originally calculated.
Use our monthly savings calculator for an accurate idea of how much interest you could earn.
Things can be very different if you deposited a lump sum into a fixed rate bond, because even if the headline rate is lower, you could actually end up earning more in interest thanks to the higher initial deposit. The table below offers a handy comparison.
Account | Interest rate | Interest earned over one year |
Regular savings account A (maximum monthly deposit £100) | 6.5% | £43.10 |
Regular savings account B (maximum monthly deposit £300) | 6.5% | £129.30 |
One-year bond (deposit £1,200 lump sum) | 4.5% | £54.00 |
One-year bond (deposit £3,600 lump sum) | 4.5% | £162.00 |
Use our lump sum savings calculator to see how much you could earn by depositing a set sum into a savings account.
As the examples above demonstrate, a higher regular savings rate doesn’t necessarily mean higher interest when compared to other accounts. This is why choosing the best deal is vital.
While it goes without saying that your first consideration will likely be the rate itself, it’s important to consider the deposit limits just as much. This is because having an account with a higher interest rate but a lower monthly deposit may result in you earning less interest than an account with a lower rate but a higher investment limit.
For example, using the table above shows that a regular savings account with a rate of 6.5% but a maximum monthly deposit of £100 would result in interest of £43.10 over the year. Conversely, if you had an account that paid a lower rate of 5% but would let you deposit £300 per month, you’d earn interest of £99.01 – more than double. This is why you should always do your sums first (our monthly interest calculator can help).
Other things you should consider include:
While the interest you earn may be lower than initially expected, regular savings accounts can still be worth considering. They can be particularly suitable if:
Many people choose to have a regular savings account alongside other versions to meet a range of savings goals, and there’s nothing to stop you opening more than one regular saver either if you want to really make the most of the higher rates.
Not sure if regular savings accounts are for you? Here are some alternatives you might want to consider:
Find out more about what type of savings account could be right for you in our guide, and always compare the top rates to make sure you’re getting the best deal.
Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.