Before we start, let's look at some real statistics about saving in the UK.
Think about and write your answers to the questions below:
By the end of this lesson you will understand why saving matters, the different ways you can save, how interest and inflation work, and how to apply this knowledge.
Drag each item into the correct category — is it a reason to save or a consequence of not saving?
The simplest way to save is to put cash aside at home — but as the amount grows, this becomes increasingly risky. Cash can be stolen, lost, and it's hard to track.
Click a definition on the left, then click the matching institution on the right.
Banks and building societies offer different types of savings accounts. Each one has different features, benefits and restrictions.
| Account | Definition | Key Features |
|---|---|---|
| Easy Access | Withdraw your money at any time without penalty, often from an ATM. | Lower interest rate. Can be penalties for multiple withdrawals. |
| Notice Account | Advance warning (30, 60 or 90 days) must be given before withdrawing. | Better interest rate than easy access, but you must plan ahead. |
| Regular Saver | A regular sum of money must be added each month. | Higher interest rate but usually a limit on deposits (~£250/month). |
| Fixed Rate Savings | Your money is "locked away" for a specified period. | One-off deposit locked away for 1–5 years. |
| ISA | Individual Savings Account — you don't pay tax on the interest earned. | Government limit of £20,000 per tax year. |
Click a scenario, then click the best account type.
Let's apply what we know about saving to a real-life scenario.
Sam currently spends all of his £5 pocket money every week on a music streaming subscription. There is currently an offer to make a one-off payment of £80 for a whole year of streaming.
a) How many weeks will it take Sam to save up £80?
b) How much would Sam save over the year with the one-off payment?
c) Do you think it is worth the wait to save up for the one-off payment?
a) 16 weeks (£80 ÷ £5 = 16)
b) £180 saved (Weekly cost: £5 × 52 = £260, minus £80 = £180)
c) Yes — Sam saves £180 and gets the satisfaction of having saved for it.
Disadvantages: Has to wait 16 weeks with no streaming. The price may increase during the 16 weeks.
Another scenario about weighing up options when it comes to spending and saving.
Jakob has saved up for a new game. He can buy it online now for £40 plus £5 postage (£45 total), or he can wait 3 months and buy the downloadable version with added features and levels for £55. He can only spend the money once.
| Option 1: Buy Now (£45) | Option 2: Wait 3 Months (£55) | |
|---|---|---|
| Benefits | ||
| Implications |
In your opinion, should Jakob delay buying the game? What would you do?
Option 1 benefits: Cheaper — save £10. Get to play the game now.
Option 1 implications: Don't get the added features and levels.
Option 2 benefits: All bonus levels and games. Easy to download (no postage wait).
Option 2 implications: Need to save an extra £10. Have to wait 3 months. More expensive.
Opinion: It depends on the weighting of the above points — there is no single right answer!
Banks and building societies offer interest on money saved with them. Interest is the reward you get for keeping your money with them — and also the cost you pay when you borrow.
£1,000 deposited at 2% interest for 1 year:
You deposit £2,000 at 3% for 4 years. How much interest do you earn?
In reality, organisations use compound interest. This means the interest earned in previous years also earns interest — giving you a higher return.
£1,000 deposited at 2% compounded annually for 3 years:
£50,000 saved over 15 years at 2% interest:
Use this calculator to explore how different amounts, rates and time periods affect your savings.
| Year | Start Balance | Interest Earned | End Balance |
|---|
The Bank of England sets the base rate to try to control spending and inflation. Interest rates in savings accounts (and on loans) are based on this base rate.
UK average savings interest rates have fallen dramatically over the last 30 years — from around 14% in 1990 to less than 1% in 2020.
Interest rates have generally fallen over the period. The biggest drop was after 2008, when the global financial crisis hit. The Bank of England slashed the base rate to near-zero to stimulate the economy.
Inflation is the general increase in the cost of goods and services from one year to the next. The government calculates this figure every month as a percentage.
See how prices have changed over 30 years:
| Item | May 1989 | May 2019 | % Increase |
|---|---|---|---|
| White sliced loaf | 49p | £1.09 | +122% |
| Chicken (per kg) | £1.89 | £2.77 | +47% |
| Milk (per pint) | 28p | 44p | +57% |
| Oranges (each) | 17p | 38p | +124% |
| Draught lager (pint) | £1.06 | £3.69 | +248% |
When choosing a savings account, you need to consider how the interest rate compares to inflation. If inflation is higher than your interest rate, the real value of your savings is actually falling.
The cost of a Big Mac has stayed remarkably close to inflation — rising about 2.23% per year compared to inflation at 2.33%.
| 2000 | 2005 | 2010 | 2015 | 2020 | 2025 | 2030 | |
|---|---|---|---|---|---|---|---|
| Big Mac | £1.90 | £1.88 | £2.29 | £2.89 | £3.12 | £3.40 | £3.68 |
| Big Mac (inflation) | £1.90 | £2.14 | £2.50 | £2.89 | £3.15 | £3.46 | £3.78 |
A Freddo has risen at 5.72% per year — well above inflation at 2.33%. By 2030 it will cost 53p when, based on inflation alone, it should only be 20p!
| 2000 | 2005 | 2010 | 2015 | 2020 | 2025 | 2030 | |
|---|---|---|---|---|---|---|---|
| Freddo | 10p | 10p | 17p | 25p | 35p | 44p | 53p |
| Freddo (inflation) | 10p | 11p | 13p | 15p | 17p | 18p | 20p |
If inflation (3%) is higher than your interest rate (1%), the real value of your savings is falling by 2% per year. Your money can buy less each year even though the number in your account grows.
Test your knowledge with these 20 questions. When you're done, click Submit Quiz to see your results.