If you have money to spare out of your wages after paying your bills, consider saving some as a cushion for unexpected bills, like repairs to your house or car.

Savings accounts come in lots of packages. The main ones are:

· Bank and building society accounts
· National Savings and Investments
· Credit union accounts
· Individual Savings Accounts (ISAs)
· Christmas club and hamper accounts

Money in a savings account generally earns a higher rate of interest than excess cash in a current account.
Points to watch

Savings accounts are a good way of earning interest on any small cash surplus in the short term – say up to five years.

Also consider inflation may eat in to the buying power of your savings.

If you want longer-term savings, then look at alternative investments like a pension or unit trust. The best way to do this is to talk to an independent financial advisor.
Also beware of some potential pitfalls to savings accounts:

Regulation and compensation
The Financial Services Authority (FSA) regulates banks, building societies and credit unions. This means your money is safer if the account provider collapses because the FSA operates a compensation scheme for savers with less than £35,000 on deposit with any single lender.

Risks
Christmas clubs set up by companies or individuals do not pay interest on your savings and are not protected with a compensation scheme if they fail. Savers in these schemes are often limited to spending their money with the shop or hamper running the savings account.

Tax
Income tax is deducted at source on savings at 20% – but some accounts, like ISAs and National Savings are tax-free. If you pay tax at a higher rate (40%) you may have to complete a tax return and pay additional income tax.

Penalties
Some savings accounts may offer a higher rate of interest than others, but to get this rate you may have to tie up a minimum amount of cash in your investment or pay a fee if you take your money out.
Despite these points, savings accounts are low risk investments, provided you steer away from unregulated providers who can go bust and leave you with no way to claim any money back.

Opening an account
Don’t forget many savings accounts offer better rates if you deposit money by post or over the internet.
Many money comparison web sites show the current best deals to make shopping around easier.

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Tags: Bank, Building Society, FSA, Penalties, savings accounts, Tax, UK Bank Accounts