Monthly savings calculator

Interest rates can tell you two things. If you’re borrowing money, as in a mortgage or loan, the interest rate tells you how much it’ll cost to have that money from the bank. If you’re saving money, the interest rate shows how much the bank will pay you for keeping your money with them.

So, let’s say you have £3,000 in a savings account, with an annual interest rate of 2%. At the end of the year, you’ll get £60 in interest minus any tax.

Banks and Building Societies are free to set their own interest rates, but they usually follow the Bank of England base rate fairly closely - and if the base rate goes up or down, savings interest rates tend to quickly follow suit.

For borrowers, if the base rate increases it’s usually bad news, as it means higher payments on mortgages. However, for savers, it’s good news, as you can expect to earn more from your savings.

And the more you pay into your savings, the more you’ll earn in interest. Although 1% or 2% might not seem like much, it can add up over time - particularly good news if you’re saving up to buy a house, as every little really does help.

Normally savings accounts offer compound interest, which means that when your interest is paid it’s automatically added to the amount you’ve got in your account, and then you start to earn interest on the higher amount. So, to use the previous example, if you have £3,000 saved, and earn £60 interest which is paid once at the end of the year, your total balance at the end of that year will be £3,060. With compound interest, any future interest will now be calculated based on £3,060 for the next year.

Then, after two years, you’d earn another £61.20 in interest, bringing your total savings to £3,121.20. Interest would then be calculated on that amount, and after three years, you’d earn a further £62.42, giving you a total of £3,183.62 in your savings account.

So, as well as earning money on your savings, you’re also earning money on your interest. The example amounts we’ve used here are quite small, but you can see how your savings could build up over a long time.

That’s why it could be a good idea to take out a compound interest savings account, and save as much as possible into it when you’re saving up to buy a house, or any other big purchase.

With some high-interest accounts, you may be limited when it comes to withdrawals, so if you do want to be able to get at your savings at short notice, check with your bank or building society if and when you can withdraw money from your account. However, if you’re saving long-term, then a compound interest savings account can be a great way of topping up your home buying fund.

Most people in the UK can earn some interest on their savings without having to pay tax by using their personal savings allowance (PSA). This tax-free amount allows you to earn interest on your savings without paying tax.

Your allowance depends on the level of income tax you pay:

Basic rate taxpayers (20%) can earn £1,000 in savings interest per year, without paying tax on the interest

Higher rate taxpayers (40%) can earn £500 in savings interest per year, without paying tax

Additional rate taxpayers (45%) don’t get a personal savings allowance

If you’re based in Scotland, although you pay different rates of income tax, the English tax bands are used for the purposes of the PSA.

You can work out how much tax you’ll pay on your savings interest using our savings interest calculator - select what rate of tax you’re on and we’ll calculate how much tax, if any, we estimate you’ll have to pay on your interest.

Your PSA covers interest earned from:

- Bank accounts

- Savings accounts

- Credit union accounts

- Building societies

- Corporate bonds

- Government bonds and gilts

- Peer-to-peer lending

Interest from cash ISAs isn’t included in your PSA, and it also doesn’t include dividend income from shares or funds. It does include interest distributions from authorised unit trusts, open-ended investment companies and investment trusts, and most purchased life annuity payments.

If you have a salary of £17,570 or less, you can take advantage of the starting savings rate. This enables you to make up to £5,000 in savings interest, tax-free - in addition to your personal income tax allowance and your PSA.

At current interest rates, you need to save tens of thousands before you have to start paying tax on your savings interest.

Assuming you’re getting an interest rate of 2% on your savings, a basic rate taxpayer can save £50,000 before starting to pay tax on savings, and if you’re a higher rate taxpayer you can save £25,000 before paying tax.

You can use our savings account interest rate calculator to work out how much you can save before you need to pay any tax.

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Before you use our savings estimator, it’s a good idea to put together a budget. That means that, as well as helping you to stay on top of your monthly expenses and day-to-day spending, you’ll easily be able to see how much money you can realistically set aside as savings.

To get started you’ll need to have details of all your expenses, so it’s worth spending some time looking through your bank statements to figure out how much you spend on fixed monthly costs. This can include things like:

- Your rent or mortgage

- Household bills

- Car finance, insurance and tax

- Subscriptions like Netflix, magazine subscriptions or the gym

- Financial products, like credit cards or loans

- Travel passes

You should also get an idea of how much you spend on variable expenses. That could include things like:

- Food and drink

- Clothing

- Toiletries

-Gifts

- Socialising

- Hobbies and entertainment

Then, you need to look at how much you have coming in from your salary or other income, how much you have going out, and see what’s left. You can use a spreadsheet to do this or there are lots of budget planners available online.

If you’re spending more than you have coming in, or if there’s not enough spare cash leftover to put into savings, then you might want to think about whether you can cut back.

Maybe you pay £100 a month for a gym membership but you haven’t been for ages? If you cancel your membership and saved the money, you won’t miss the cash and will have effortlessly saved £1,200 in a single year.

Or maybe you need to review your household bills instead. Although bills are undoubtedly getting more expensive, there may still be ways you can save, perhaps by changing to a cheaper mobile phone contract, or ensuring you’re on the right council tax rate.

Let’s say you want to save £20,000 for a house deposit. It’s a lot of money, but you can use our savings goal calculator to work out how much you need to set aside each month, and how long it’ll take you to reach the goal amount.

It can seem less daunting if you break your goal up into chunks. So rather than thinking you need to save £20,000, you could break it down into four chunks of £5,000 - or even twenty chunks of £1,000.

You may find it easier to set up a standing order and transfer the money from your account every month on pay day - that way the money will be in your savings account before you even notice it’s gone.

Finally, make sure that your savings are working as hard as they can for you. There are lots of different places and types of account where you can save your money, depending on the amount you’re saving and your goals.

If your goal is to buy a property, then our savings planner will help you to understand when this might be feasible for you, based on how much you can put aside every month.

Saving up your deposit, especially as a first time buyer, can be the hardest part of the whole process.

The bigger your deposit, the more likely you are to get a better mortgage deal and a lower interest rate, so it could be worth taking a little longer and saving as much as possible.

However, that’s not to say that you can’t get a good mortgage if you have a lower deposit. If you’re not sure what type of mortgage you might be eligible for, you can get started with our Online Mortgage Finder.

Most first time buyers put down between 5 to 10% of the property value as a deposit. Whilst having a deposit of 15% or more will give you a better mortgage deal, there are options for those with a deposit of 5% and there may also be government schemes to support those who are eligible to buy a new home.

It’s a good idea to do your research on the cost of houses in the area you’re looking in and get an understanding of how much the type of properties you’re interested in are selling for. Speaking to local agents and looking at property websites is a good place to start.

Once you know how much you need to save for your deposit, it’ll be easier to make a plan to reach that goal. You can use our long term savings calculator to work out how much you need to save every month to get you to the deposit amount you need.

If you know you want to save £20,000 in three years, for example, then you’ll need to save around £556 per month.

Or if you want to save £10,000 and know that you’re able to set aside £200 a month, then our calculator will show that it’ll take you about four years and two months to reach your goal.

In the UK, most mortgage lenders require that you have at least 5% of the value of the property to put down as a deposit. Generally, though, you’ll get a better deal if you have 10% or 15% to put down. If you’re looking to buy a property valued at £300,000, you’ll start to see better rates if you have a deposit of at least 10% of the amount you want to buy for, or £30,000.

Many mortgage lenders offer 90% deals, which means you’ll need a 10% deposit, although you’ll usually get a better interest rate if you have a bigger deposit saved up. If you’re looking to buy a property for, say, £200,000 and you want to save the £20,000 needed for a 10% deposit, you can use our savings calculator to work out how long it’ll take you to save your goal amount.

Some UK experts suggest you should save 20% of your income every month. That’s based on the 50-30-20 rule, where 50% of your income goes towards essentials (including your monthly mortgage repayment), 30% is used for discretionary purchases, and you save the other 20%. However, the amount you can realistically save should be dictated by your income, goals, and other commitments - there’s no set rule that works for everyone. If you’re saving for something specific, or have a target amount in mind, you can work out how much you should set aside each month and how long it’ll take you to reach that goal. The savings calculator can help make this task easier.

It’s commonly said that you should save up the equivalent of three to six months of your salary, so you have a contingency fund in case of emergencies to help cover your monthly repayment and other bills. It can be easier to save smaller amounts regularly, rather than saving larger amounts occasionally. You can use our savings calculator to work out how much you should be setting aside every month if you have a particular savings goal in mind.