Current Accounts, Instant Access Savers, ISA's, GIA's - What the finance?!
While I sit patiently waiting for my new harmonica to be delivered (Don't ask! Or do, actually, then I can tell you all about my new harmonica...if it ever comes. Which hopefully it will, as I'm sitting waiting for it! Anyway...) I realised this space has a lot of jargon in it. One of the things I pride myself on when talking to people about this stuff (or anything I'm interested in really) is my ability to make seemingly complicated things easily digestible and actionable: there isn't much use in trying to help people by teaching them things they end up even more confused about.
That is one of the problems with the 'finfluencer' space: although I'm hoping to expand into some shorter form content before too long, it does seem to breed colloquialisms and acronyms harder than the Urban Dictionary.
How bloody irritating would it be if somebody repeatedly told you you NEED to get your money into an ISA, preferably a S&S to stop you having to SA for HMRC purposes?! Oh, wait... Oooops!
The truth is, for the vast majority of people, the meat and bones of it all is simple. Painfully simple. Teach-your-five-year-old-and-get-them-to-do-it-all-for-you kind of simple.
It's life and everything in it that ends up complicating things - but never fear, for the Budgetopian is here.
Let's go over some of the most common acronyms, names, titles etc you'll hear in this space, and whether or not you should be bothering with them in the first place.
The Current Account
Your current account is the banks equivalent of the space under your mattress filled with cash - or is it?
Before I started paying any attention to my money, this is where I kept everything I owned. Whether I got paid or was receiving a student finance payment, whether I was paying a bill or buying groceries, whether I was trying to put a bit away for later on (HA!), it all went in and out of the current account.
The benefits of keeping all your money in a current account? Absolutely ZERO. The bank won't pay you any interest on cash held in a (regular) current account. How much do you need to keep in a current account? In my opinion, the absolute BARE MINIMUM.
Gone are the days when your bank balance is a number in a large, dusty tome sat in the back of a vault (was this ever actually a thing?), and even then I'm sure savvy wannabe Budgetopians had convincing arguments for keeping the bulk of your money elsewhere. The fact is, it's so incredibly easy now to spread your money around to either earn interest or simply to keep your spendywendy hands off of, there really is no reason at all to keep more cash than is necessary in a current account.
The Budgetopian use of a current account? Give the bank as little of your cash as you need to - have your salary paid into it and your bills paid out, and the rest, including your spending and saving, all goes elsewhere, either by automation or manually.
But where should it go?
Savings Account
A savings account is like a current account, with a few major differences.
With a (regular) savings account, you won't have a card to go with it. Unlike a current account, the bank (whether that be a high street bank or a challenger bank such as Monzo or Starling) pays you for the privilege of holding your cash in the form of interest. The amount of interest will depend on the provider and the base rate - this is just the amount of money the central bank charges other banks, and determines how much interest the bank is willing to pay you.
To complicate things slightly, there are different kinds of savings accounts: easy-access, regular, and notice serving accounts. Regular savers are accounts that pay more interest, but limit your monthly deposits and usually have a max limit. Notice serving accounts are accounts that require you to 'serve notice' to the bank in order to withdraw your money, and should pay higher interest as the bank essentially 'locks' your money for a predetermined length of time.
Easy, or instant, access savers are exactly what they say on the tin, instant access meaning if you need your money, you can withdraw it instantly.
My opinion?
Regular savers can be good as they can help you establish a savings habit of putting a small amount away each month. However, they tend to be linked to 'premium' current accounts and rarely actually pay better interest than other, more readily available instant access accounts. Likewise for notice serving accounts - logic would dictate they should pay you far higher interest than any other form of savings account, as the bank is essentially locking your money away for a time, yet sadly this isn't the case.
I opt for the currently highest paying instant access savings account available - that way I have the flexibility of withdrawing if I need to, along with market leading interest. I keep my emergency fund in an account like this, so it's there if I need it and pays me interest at the same time.
A no brainer!
N.B - in the UK, you may be liable to pay tax on interest earned over £1000 in a savings account. Check https://www.gov.uk/apply-tax-free-interest-on-savings for more details.
ISA's
Stocks and Shares / Cash
This is where things get fun (I promise!)
ISA stands for Individual Savings Account.
There are a few key differences between an ISA and a regular savings account, the first of which being that any gain you realise inside an ISA account - whether that's interest on cash, in a Cash ISA, or growth on held assets in a Stocks and Shares ISA - is completely tax free. You aren't liable to pay tax on any gain inside an ISA. The second difference is that everyone has a personal ISA allowance each tax year, currently sitting at £20,000. This means you can pay a total of £20,000 across every type of ISA - if I had both a Cash ISA and a Stocks and Shares ISA, I could pay £10,000 into each account, each tax year without going over the limit.
So what's the difference between the different types of ISA?
CASH
A Cash ISA functions much the same as a normal savings account, but with the aforementioned tax-free allowance. You still pay into it as you would a normal saver, and it still pays you interest based on the current determined rate. In my personal experience, withdrawing from a Cash ISA can take slightly longer (within the one to two day region) than withdrawing from an instant access saver, so you should bare this in mind if you think you might need the funds.
Have a short-medium term financial goal you're saving for? A Cash ISA could be a great place to keep your cash and earn some interest tax free while doing so.
STOCKS AND SHARES
Can you guess where this going?
A Stocks and Shares ISA is an ISA that allows you to buy and hold stocks and shares within it. Remember my basket analogy? A S&S ISA is like a basket that can hold your investments and allow them to grow, tax free.
When you pay into a Stocks and Shares ISA, your money will show as cash being held within the account. You can then, within the ISA itself, choose to use that cash to buy investments, such as index funds or even individual stocks, if you so wish.
In my opinion, these accounts are for the long-term. We're talking years of buying and holding under the premise that the stock market will grow over time, and reward us for long-term investing. The reason we think in the long-term, is because short-term investing in the stock market is a good way to lose money. You can, of course, use your S&S ISA to trade, trading being the buying and selling of individual stocks. This is not how I invest however, therefore there isn't much I can tell you about it.
The real things to think about when it comes to your Stocks and Shares ISA are fees, and funds.
Choose a provider based on low fees, as some charge more than others for your account. Some charge nothing!
Then choose funds based on your investing philosophy - if you want to back the global stock market, there's funds for that.
If you want to back single economies, there's funds for that. If you are an ethical investor interested in green energy, there's funds for that. Do your own research, and have fun doing so. It doesn't need to be, and isn't, scary, daunting or boring!
GIA
Standing for General Investment Account, a GIA simply gives you the opportunity to invest in stocks and shares outside your £20,000 ISA limit. Individuals can use a GIA to invest if they have already maximised their ISA contributions for the tax year - if you are here, and this applies to you, then please send your secrets to budgetopian@gmail.com
I hope that helps you have a better understanding of the different kinds of accounts on offer while you travel your own Budgetopia journey.
You might have noticed I missed out one, incredibly important thing - PENSIONS. Those, my dear friend, are definitely for another day, so stay tuned.
As we come to the end of this post that was supposed to be short and sweet, let me hit you with a BUDGETOPIAN BLUEPRINT for account success.
Two current accounts - one for being paid your salary into and paying your monthly bills out, one for spending money
Two savings accounts - either a Cash ISA and instant access account (depending on current interest), one for your emergency fund (3-6 months of expenses), one for short and mid-term savings
One investment account (NOT including pension) - a Stocks and Shares ISA for regularly buying and holding investments for long-term financial freedom and success, AKA a ticket on the bus to Budgetopia BABY
Use this blueprint along with your budget to truly have ultimate control over your finances.
Your budget will help you decide how much to split into each account, but ultimately, as long as you stick to the fundamentals you'll be right as rain.
And eventually, it'll be actually raining. You'll make it rain. With all your money. Got it?
Have a good'n!
