Time to start saving?

Despite the fact that interest rates on savings accounts are now at their highest point this century, reaching the dizzy heights of 6%+, the savings ratio - that is, the amount we save out of our disposable income - is the lowest it has been since 1960. Indeed, at a time when the likes of Sainsbury's Bank are offering 6.25% and Icesave are paying 6.20%, we're hardly saving at all.

While interest rates have gone up, the savings ratio actually fell to a new low of 2.1% of disposable income in Q1 2007 (from 3.9% in the previous quarter and 6.3% at the same period in 2006), according to the Office of National Statistics (ONS).

But now, after five rises in Bank of England base rate over the past 12 months - giving a rate of 5.75% - interest rates on savings accounts are starting to look rather inviting and it's a good time to rethink your savings strategy.

Why we don't save

ONS says we've been saving less because employers aren't paying as much into pension funds and household disposable income has been falling. The truth is we're still borrowing and spending. To put it bluntly, many of us spend more than we earn and long-term it leads to disaster.

According to research from National Savings & Investments (NS&I), a couple of reasons given by its respondents for not saving are: 'not enough left over from disposable income', and 'can't see the point'.

What it means is that we haven't got much of a cushion to fall back on should something untoward happen and we don't have enough savings to put into our pensions. Only half of us save on a regular basis, says NS&I.

Can you take another squeeze?

With disposable income subdued and base rate expected to reach 6% by November, your finances could start to feel more and more squeezed.

Of course some of us won't feel the pain until a year or two ahead because 78% of first time buyers and those moving or remortgaging are on a short-term fixed rate. Therefore, why not (if you can) put some spare cash away now to protect yourself against higher interest rates in the future? After a while, you may not even notice the £100 or so being tucked away for growth. NS&I advises that ideally everyone should save one fifth of their income.

18 July 2007 © Moneyextra.com

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