How a short term savings account works
If you aren’t in a position to lock away your savings for a long period of time, then a short term savings account could be a good option for you. The name ‘short term savings account’ can apply to a number of different account types, such as:
With a short term savings account, you can deposit your money for a short amount of time – anything from three months to one year. Usually, you still have access to these funds during this period if you need to withdraw money.
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What is a short term savings account?
A short term savings account usually refers to a style of savings account where your money stays in an account for a short period of time. This allows your savings to accumulate interest but doesn’t lock your funds away for a long amount of time.
This type of account is usually a good option if you’re not comfortable committing to your money being stashed away for a lengthy period of time, as we all know life can be unpredictable. Short term savings accounts can come in different shapes and forms – from a six month fixed rate bond, to easy access accounts and notice period accounts. These accounts will have varying rates of interest and different withdrawal rules, so it’s worth comparing the details of each account before making your choice about the best short term savings account for you.
What are the types of short term savings accounts?
Fixed rate accounts
Fixed rate savings accounts allow you to lock your money away for a fixed period of time at a fixed interest rate that won’t fluctuate. This can be a good choice if you want to avoid market fluctuations and know exactly how much interest you’re earning over that set amount of time.
Fixed rate accounts can hold your money for as long as 5 years but you can also find fixed rate accounts with a shorter term. If you’re looking for a shorter term option, you might want to consider a six month fixed rate account or a one year fixed rate account. Once you have deposited your lump sum, you won’t be able to add or withdraw to this amount before the agreed period. Some banks and financial institutions will grant access but it usually incurs a penalty.
Easy access savings
Easy access savings accounts allow you to deposit money and earn interest with the benefit of retaining access to your funds. While the interest rates may be lower than a more restrictive savings account, you don’t need to worry about penalties or not being able to withdraw or add funds to your account. There may still be some rules and regulations around how and when you can withdraw your funds but these will usually be a lot more flexible than a fixed rate account.
Notice accounts allow you to put away your savings, earn interest, and still be able to withdraw money as long as you give your bank or building society notice. The notice period to withdraw money is usually between 30 and 180 days depending on the account and the individual regulations of the bank. These kinds of accounts tend to have variable interest rates which means that the interest level will go up and down in accordance with the market.
What are the pros and cons of short term savings accounts?
When it comes to deciding how best to save your money, it’s always worth weighing up the pros and cons to find the best short term savings account for you. Short term savings accounts (whether it’s a fixed term, easy access, or notice accounts) all have their own set of pros and cons which can be explored when you decide which type of account you want.
Here, we look at the advantages and disadvantages of choosing a short term savings account.
Pros of a short term savings account
- It’s rarely a bad idea to keep your savings in an account where it can accumulate interest – even for a short amount of time. With a short term savings account, your money still has the chance to grow.
- Keeping your money in a savings account also means you’re less likely to spend it. Having limited access to your funds (even in the short term) can help prevent spontaneous spending. This is especially true with fixed rate accounts and notice accounts where you face a few more hurdles to access your money in comparison to the easy access account.
- Another advantage of a short term savings account is that you have a choice of which kind of account you want. You can opt for an account with heightened restrictions if you’re able to lock away savings for higher interest rates or you can keep it flexible with an easy access account. As these accounts are based around the short term, you can also move your money to a more competitive account and chase the best deals rather than getting locked into long term rates.
Cons of a short term savings account
- One of the drawbacks of choosing a short term savings account is that the rates of interest are not usually as high as with longer term accounts. Generally, with fixed rate bonds, the longer the term the more attractive the rates. Also, with notice accounts, the more restrictions around assessing your money, the higher the rate.
- Another disadvantage of picking a short term account is that you may need to move your money around more often. This can be a benefit if you want to follow the best rates. However, it can also be a drawback in terms of the time and energy you may spend researching and finding the best rates on a regular basis. Fortunately, Raisin can quickly and effortlessly help you to compare different savings accounts.
Is a short term savings account worth it?
A short term savings account can be worthwhile if you still want to earn interest but you aren’t in a position to put your money away for a long period of time. These types of accounts are often flexible and even when they have tight restrictions, you can be safe in the knowledge that it’s only for a limited amount of time.
Opening a short term savings account may also be a good opportunity for you to see what works best for you. You may decide you’re ready to invest in longer term fixed rate bonds in the future, depending on how you feel about the short term experience.
What should I consider when opening a short term account?
When opening a short term account you should consider which account is best suited to your needs in the short term. Some of the considerations you may want to make will include:
- How long you can afford not to have access to your money
- What kind of access you want or need
- Whether you want to able to add or withdraw during the term
- Finding the best interest rates
When opening any kind of savings account – both long and short term – you should always take the time to compare the best interest rates and offset that against the terms and conditions being offered.
You can easily compare alternative saving options at Raisin UK, to find the best savings account for you.
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