How to save an extra £500 in one year by opening a savings account

There’s never been a better time to get your savings in order. 

The Office of National Statistics released its latest inflation figures last week and the inflation rate has slowed to 2.3% in April from 3.2% in March. 

This is good news for savers as it means the interest rates on savings accounts are now even more competitive. This is because if the interest is higher than the inflation rate it gives your money more purchasing power. 

The top rates on savings accounts are currently above 5%, which means these rates are beating inflation by more than double. This is why it’s important to move any money that’s currently sitting in an account earning little to no interest - as you could be missing out on earning some extra cash. 

Today, comparing savings accounts and finding a better deal can really pay off. 

But what does a better deal look like? 

Of course the interest rate is important, as this will determine how much extra money you could earn, but savers should also align the account with their savings goals. 

Find the right account for you

For example, for money that savers might need to access regularly, an instant or easy access account has that flexibility. But a fixed-rate account works better for a lump sum that someone is saving for a future purpose.

Savings accounts also vary in terms of how much money is needed to open one. This could be as little as £1 or as much as £25,000, so this will also influence the decision of which savings account is best for you. 

Some people may say that opening a savings account is too much effort for little reward, but whether you have a lump sum or you just want to start saving, it will pay off in the long-term. 

Boost your savings by £500+

So, let’s take a look at the top interest rate for a one-year fixed-rate account in the market today. This is currently from National Bank of Egypt UK via Raisin and it requires £10,000 to open this account. As it’s a fixed-rate account, the 5.22% interest rate is locked for one year but it does mean you can’t make any further deposits or withdrawals during the term. 

If a saver added £10,000 to the account at the beginning of the term then after one year they would have earned an extra £522, increasing the total amount in the account to £10,522. That’s not bad for just opening a new savings account. 

And it doesn’t stop there. In our recent statistics report, we found that the mean average amount of savings in a UK savings account is £17,365. So, if someone added this amount to the same account then they would earn an extra £906.45 after one year. 

Save little and often

However, this average figure will of course include people that don’t have that large sum ready to save. We found that 13% of people have nothing in their savings and a third of UK savers would struggle to cover a month’s worth of living expenses if they lost their primary source of income. 

For anyone in this position, the thought of saving more than £10,000 will understandably feel out of reach, but there are still some options available. 

Chip is currently offering an instant access account with a boosted rate of 5.01% for 12 months. This can be opened with £1 and then if you make a deposit of £20 each month you’ll earn just over £12 in interest with a total of £253.07 after 12 months. Saving little and often can still grow a savings pot that’ll help for a rainy day. This competitive interest rate will also decrease after 12 months, so make a note in your diary to compare accounts when this term ends as you might find a better deal then. 

Don’t forget about tax

Plus, remember the interest earned above doesn’t take into account personal circumstances and you may need to pay tax if you are a basic-rate taxpayer and the interest earned is above the personal savings allowance of £1,000. If savers are paying tax on the interest earned, then it’s worth exploring ISAs as this type of savings account has a £20,000 tax-free allowance.

Finally, the savings market is always changing, and if the Bank of England decides to reduce the base rate from 5.25% this could impact the interest rates on savings accounts in the future. So, is now the time to take advantage of these competitive interest rates?