What is the point of a savings account? I don't get it.

Brand_X

Okay, for the first time in a long, long time I have £2000 in the bank and the bills are paid already, so I'm thinking I should put £1000 into a savings account before I fritter it away.

But what is the point of earning 1% in a year? That's just £10, I can do a lot better than that selling stuff on eBay. Maybe I'm dense but I can't see how anyone on a normal income can make enough money on their savings for it to be worth doing.

Gram_Parsons

A Classic Plus a/c at the TSB will give you 5% gross on your £2000 and you can have two accounts. I'm just going through the switching process to TSB myself.

Fruit_and_Nut_Case

Brand_X wrote: »

Okay, for the first time in a long, long time I have £2000 in the bank and the bills are paid already, so I'm thinking I should put £1000 into a savings account before I fritter it away.

But what is the point of earning 1% in a year? That's just £10, I can do a lot better than that selling stuff on eBay. Maybe I'm dense but I can't see how anyone on a normal income can make enough money on their savings for it to be worth doing.

Well spotted. The perceived wisdom at the moment is to put your money in one or more of the better-paying current accounts. You still won't get rich quick but it can be better than any savings account around at the moment.

Archi_Bald

Having £1,000 or £2,000 in your emergency fund isn't much, but it is a lot better than having nothing in it. An emergency fund is for unexpected events - boiler packing up, PC not working (end of your eBay gravy train?), car break down, unemployment etc etc etc.

The more interest you get for your money, the faster your emergency fund can grow. Thus you need to look for the best places for your money, and I agree, 1% savings account are best avoided, particularly when you can get 5 times more than that in current accounts.

Glen_Clark

Even 1% is better than the big investors can get. They can't open a building Society account and deposit their £millions. For a similar level of security they would have to buy UK Government Bonds which currently yield 0.39% Gross - and even that is only if you tie it up for a year.

Scarpacci

The point of saving is to have money, not to make money. By saving £1,000, you have a thousand pounds - which is a big deal if you start with nothing. As you save more, the more value comes from having that - in security or in possibilities. People often save for goals - be it a car, a house or retirement. They're doing it not to make money, but because they'll need that money some day.

The point of savings accounts, high interest accounts or even riskier investments is usually just to maintain wealth - not necessarily build it by much. You have your thousand pounds today and you want it to be worth at least a thousand pounds in tomorrow's money. Even with the low rate of inflation, most of those savings accounts won't be protecting the money from interest after tax.

I'm not sure if your eBay comments mean you're a professional seller on eBay? Do you mean you could use that £1,000 to buy goods and sell on eBay for profit? It's an interesting point because what's often forgotten about rich people is they usually made their money by having a business which could deliver a profitable return on capital - which is much higher than typically available in savings and investments. Few people have become rich through investments and I'd say none through savings, you need something that can profitably turn money first.

Glen_Clark

Scarpacci wrote: »

with the low rate of inflation.

The so called 'low rate of inflation' is a misleading statistic created by ignoring inconvenient items like the 20% rise in London house prices, and the huge increase in public borrowing to pay the consequent increase in housing benefit.

chucknorris

Brand_X wrote: »

Okay, for the first time in a long, long time I have £2000 in the bank and the bills are paid already, so I'm thinking I should put £1000 into a savings account before I fritter it away.

But what is the point of earning 1% in a year? That's just £10, I can do a lot better than that selling stuff on eBay. Maybe I'm dense but I can't see how anyone on a normal income can make enough money on their savings for it to be worth doing.

Personally there isn't any point (for me) and I have moved/am moving out of cash into investment. But I am accepting more risk to do this, and I don't need the cash in the short term. If for example a first time buyer has substantial savings, the risk of the stock market in the short term is very high, and they are probably better off accepting that their net savings rate is less than the rate of inflation, so they are locking in a smaller loss 'real term' than a potential dip in the stock market.

ChesterDog

Savings represent the safe end of the risk/reward spectrum.

It has generally been the case that you could easily find a savings account to match or beat inflation, thereby maintaining or adding to the value of the money in it. For the time being, that is not the case; you will need to hold several decent current accounts to achieve this. In effect, general savings products are now asking you to pay for their security.

You will need to think about putting some money into something a little further along the spectrum to seek real growth.

Right now, you don't really have the capital to do this, but KEEP SAVING. That way your capital will increase (even though it's being nibbled by inflation) and you will be able to diversify into more promising investments.

As others have stated, from a small start you are not going to see spectacular results, but at the very least you will build yourself a good cushion to protect yourself from some of life's unexpected problems.

jimjames

Brand_X wrote: »

Ok

But what is the point of earning 1% in a year? That's just £10, I can do a lot better than that selling stuff on eBay. Maybe I'm dense but I can't see how anyone on a normal income can make enough money on their savings for it to be worth doing.

You can do far better than 1% on £1000. Combine 2 current accounts and you can increase your return from £10 to £125 which equates to 12.5%.

If you can make money on Ebay then why not do that as well. As mentioned above savings are for unexpected or planned items that are beyond a monthly pay packet.

Scarpacci wrote: »

Few people have become rich through investments and I'd say none through savings, you need something that can profitably turn money first.

If you added the word "quickly" in so it reads "Few people have become rich quickly through investments" then I'd agree.

Over time you can become significantly wealthy by investing and the effect of compounding returns but that is not a short term option and could be say for 30 years plus. As a few examples you can see in the papers stories of average people who have died but find they have millions invested despite only ever having earned normal wages.

Freecall

The comparison with selling stuff on ebay is not really a valid one. That would be a business venture which would have costs (how would you value your time for example?) and risks.

If you were good at it you could possibly make more money than the couple of % return available in savings accounts. If you were very good then you could perhaps make a lot of money, there are after all ebay millionaires. On the other hand you may not of course.

This is the whole basis of business. Obtain capital a lower rate than you can put it to use in order to benefit from the difference.

In a more general sense there has been a move away from cash savings towards investments by large sections of the population over the past couple of years for the very reason you highlight.

Only time will tell if many of these who now have significant exposure to equities through trackers and the like have done the right thing. I expect that a proportion will get their fingers burnt in some way.

Over the longer term, holding wealth in cash (savings account) will tend to under-perform what is available if you have the opportunity to put it to good use elsewhere (a well run ebay venture perhaps?) but that does not mean that cash does not have its place in a balanced portfolio of assets.