Is it worthwhile to open a regular savings account?

Although a 7 percent interest rate is appealing, how much can be saved in a standard saver account, and how does the interest rate function specifically?

Regular savings accounts are probably the ones with the highest interest rates if you're looking through the top savings accounts available.

The Co-operative Bank and First Direct, for instance, currently offer regular savings accounts with a 7 percent interest rate. There are also versions with interest rates of 6% or higher offered by a number of banks and building societies.

Previously offering an alluring 8 percent on its regular saver, Nationwide has since reduced this to 6 to 5 percent.

The best offers pay less than 5%, which is significantly higher than the rates offered by fixed-rate bonds and easy-access accounts.

A regular saver account would seem like a no-brainer if you only consider the headline interest rate. But what's the catch? It would be reasonable for savers to believe that their savings would be accelerated far more quickly than they would in a lower-interest account.

But there's a pretty big catch. Regular savings accounts typically don't allow you to start with a big lump sum and limit how much you can contribute each month.

This indicates that only the funds in the account will receive the advertised interest rate during the first month.

Suppose you have a 7 percent First Direct account and save £200 a month. Yes, you will receive 7% interest on your initial £200 monthly deposit. However, you won't receive 7% of the £2,400 you save overall this year. Your total income is slightly more than half of the headline rate.

The head of personal finance at Hargreaves Lansdown, Sarah Coles, tells BFIA: "A regular saver's headline rate appears to be excellent, but keep in mind the effects of drip-feeding the money in.

The last account will only be in there for a month, but the first 200 will be invested for the first year, and the accounts typically last for a year. This indicates that, on average, you're only receiving half of the advertised rate.

How a standard savings account's interest rate operates.

Let's examine the interest rate that can be earned on a standard savings account in more detail.

Because Principality Building Society's top regular savings account only lasts six months instead of the more common twelve, and because you can only deposit up to £200 per month, it currently pays 7:05 percent. For the most recent offers, visit the Best Regular Savings Accounts.

Let's use the more traditional First Direct 7 percent regular saver for our example, which allows up to £300 to be saved each month and lasts for a year. The Co-op regular saver pays 7% as well, up to a monthly cap of £250. ).

A monthly contribution of £300 to the First Direct account adds up to 3,600 for the year.

When the entire 3,600 is eventually deposited into the account, many savers anticipate earning 7% interest. At year's end, you would receive 252 interest if that were the case.

However, the advertised rate only applies to the money saved in the first month, or for a full year.

The first three hundred will therefore have saved for a full year and receive the full seven percent. The account will only hold the second 300 saved for 11 months. Thus, on 300, you will receive eleven twelfths of seven percent. The ten twelfths will be the next 300, and so on.

Moneyfacts states that a regular saver who deposits £300 per month and pays 7% interest would actually earn 139 point 46. In terms of interest rates, this is equal to 3point 87 percent.

You can view additional examples of interest rates paid by a standard savings account by using Moneyfacts' monthly deposit calculator.

What distinguishes standard savings accounts from other kinds?

Is this type of account the greatest option for you, considering that regular savings accounts have monthly payment limits and that the total interest rate is significantly lower than the headline rate?

Suppose you wish to save £3,600. Let's examine the First Direct account in comparison to the highest-paying one-year bond and easy-access account. Should you drop-feed this into a regular saver or put the entire amount in an easy-access account or one-year fixed bond?

Moneyfacts.

Both one-year fixed-rate bonds and the best easy-access account pay 4.65 percent, which translates to 167.40 interest on a 3,600 deposit, as the table shows.

First Direct, on the other hand, pays 139.46, which is less even though their interest rate is higher at 7%.

The Atom Bank easy-access account appears to be the greatest choice if you want the ability to withdraw your money and don't want to lock it up for a year.

The one-year fixed-rate bond might be a better option if you don't need access to your money and want the assurance that the interest rate will remain constant. The Bank of England base rate is expected to decline this year, which could result in savings providers lowering their rates.

Coles notes that a regular saver "may be the most effective approach, but if you already have a lump sum, the fact you can only put in a limited amount each month with a regular saver means you can do better elsewhere." This is especially true if you are starting out with a small sum to save and are not looking to build your savings.

Do you want to open a regular savings account?

As they foster the saving habit, regular savings accounts are perfect for gradually increasing a pot, according to Rachel Springall, a finance specialist at Moneyfactscompare . co . uk.

However, she continues: "Because some of them can be restrictive and may not be appropriate for larger deposits, consumers will need to determine if they are the right choice for them." Regular savings accounts may also change to a flexible account at the end of the term, which may not offer a favorable interest rate. If savers are still accumulating money for their long-term objective, they must remember to reinvest.

For those with a sizable lump sum to invest, Springall says a fixed-rate bond is a good option if they want a guaranteed return and don't want to be tempted to spend the money right away.

Before making an investment, it's a good idea to read the terms and conditions of any bond because those who change their minds can get their money back if it falls within the cancellation agreement.

On the other hand, if someone requires flexibility with their deposits, an easy-access account might be a better option. But, according to Springall, "some providers may have a rate bonus, while others may place a cap on the total amount that can be taken out over the course of the year. To avoid disappointment, carefully compare offers and note any bonuses on your calendar.

To help you choose the best account for you, we go into greater detail about these two options in our article on easy-access savings vs. regular savings.