According to Marcus by Goldman Sachs, getting to know these financial terms could be worthwhile. It comes as research by the bank found more than half (56 percent) of UK adults said they need to save more in case of a future financial emergency, as a result of COVID-19.
Furthermore, the research suggests women find it less easy to save (44 percent) than men (34 percent).
Amanda Le Brocq, Head of Strategy at Marcus by Goldman Sachs in the UK, commented: “We’re passionate about helping people reach their savings goals, whether they’re saving for a new house, their children’s future, retirement or for an emergency fund.
"It’s encouraging that our research reveals so many people make saving a priority.
"However, it is also clear that many find it difficult to save and worry that they don’t have enough set aside for their goals.”
For those struggling to save, Marcus by Goldman Sachs has shared some tips on helping people to upgrade their saving habits.
This includes getting to know certain financial terms.
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"Even the most experienced of savers might not understand all the financial terms they come across when looking to upgrade their saving habits," the bank said.
"Here are three of the most used, but often misunderstood, terms you may encounter:
AER and gross interest rate
"The Annual Equivalent Rate (AER) illustrates what your interest rate (the gross interest rate) would be if interest was paid and compounded once each year.
"The key thing to remember when comparing different savings accounts is to compare like with like – so either AER with AER, or gross with gross.
Base Rate
"In the UK, interest rates can be influenced by the Bank of England base rate. The Bank of England occasionally raises or lowers the Base Rate to help influence the UK economy.
"It is part of the Monetary Policy action it takes to meet the target that the Government sets to keep inflation low and stable.
"If the Base Rate goes up or goes down, it can affect the rates that banks offer to customers – and ultimately how much interest you can earn on your savings."
Compounding, or compound interest
"Compounding is when interest is paid on your total savings, including your previously earned interest.
"In other words, compound interest is interest on interest. And it helps your savings grow faster."
"Then, you can see if there is any wiggle room in your monthly budget which can be allocated to this fund. Even cutting back £25 a month will quickly add up and provide priceless peace of mind.
"Your emergency fund should be safe and easily accessible for when you need it – an easy access savings account is a great option."
Budgeting can help maximise saving potential, according to the bank.
"Whether you’re looking to set aside a little every month, or a more significant amount, getting back to basics with a budgeting method can help optimise the amount you save to reach your financial goals," the bank said.
Meanwhile, making savings work harder could also be important.
"If you want to start building a savings pot for the future that is protected from tax, which you can still access if you need to, an easy-access cash ISA is a great place to start," the bank said.
"While the Personal Savings Allowance allows most savers to earn interest each year up to a certain limit tax-free, all interest earned on savings held in an ISA is tax-free for as long as you keep it there. So, you can grow your tax-free savings year after year, helping you create a healthy savings pot for the future.
"If you’re looking to build longer-term savings, you could also think about investing your savings, with a stocks and shares ISA or a general investment account, for example."
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