Getting the best out of your money starts with saving it. Whether you’re saving for a holiday, building a mortgage deposit, creating a fund for your children, or thinking about retiring in comfort, it is vital to make your money work as hard as it can. This article will help you understand how you can achieve what you want.
Knowing what you want from your savings ensures that you’re taking the most effective approach. It’s likely that you’ll have started with a simple savings account, but over time you might also use different forms of cash savings as well as stock market-based investments such as shares and funds.
Each type of investment, or asset class, has its own role to play. Much will depend on your goals, some of which will be relatively immediate, such as saving for a holiday, and others will be more long term, such as building a pension pot. But it’s important to remember that different savings products act in different ways.
For example, cash accounts are ideal for rainy-day savings because they can be accessed either immediately or at short notice. However, the interest rates can be very modest, which means the value of your savings can be eroded over time by the effects of inflation. That’s why stock market-based investments can sometimes be more effective when saving for goals that are at least five years away. But while they typically provide better returns over the long run, there is more risk involved.
Goals from rainy days to retirement
This is likely to be a short-term goal, so locking your money away probably isn’t a good option. The main option is a cash savings account with a decent interest rate. Individual Savings Accounts (ISAs) are usually the first port of call. Currently up to £20,000 can be paid into an ISA per tax year, spread across cash and investment-based ISAs. Other options include fixed-notice savings accounts, which pay a little more interest but require advance notice of withdrawals, while some current accounts now pay competitive interest rates, provided a certain balance is maintained. Take time to research some money-saving tips and compare the different accounts available.
A mortgage deposit
Cash savings would usually be the place to start here too. But the low interest rate environment means returns are often sluggish. Other options come into play if paying a mortgage deposit is likely to be five to ten years away. For example, you could use some of your ISA allowance to invest in stocks and shares, taking a little more risk for a better chance of making your money grow faster. For first time buyers there is currently the option of paying up to £4,000 per person into a Lifetime ISA. This is a cash-based ISA where the government will add a 25% bonus to any money paid into it. Paying in the maximum of £4,000 each tax year would mean the government giving an extra £1,000 as a bonus which could really assist with reducing the amount of time spent saving.
Saving for children
The longer you invest, the more risk you can take with your investments, as stock market volatility – the ups and downs – are ‘smoothed out’ over time. If you start a fund for a child when they are born, that gives you at least 18 years to build up a decent-sized fund. You can use a Junior ISA to invest on behalf of a child, and if you start paying £170 a month into a Junior Stocks and Shares ISA when a child is born, you’ll end up with around £53,000 by the time they turn 18 (assuming average annual growth of 5%).
This figure is only an example and not guaranteed – it is not a minimum or maximum amount. What you will get back depends on how your investment grows and on the tax treatment of the investment. You could get back more or less than this.
Building a retirement fund
Again, unless you’re within a decade or so of retirement, this is a long-term goal that means you can afford to take a little risk. Exactly how much risk depends on your own personal risk appetite, and it’s always a good idea to spread your money across different types of investments to manage investment risks (this is called diversification). Stocks and Shares ISAs can be used in saving for retirement, but there are good reasons to use a pension too. For instance, the government pays tax relief on the money you pay into your pension, while your employer will top up the contributions you make to any workplace pension you open.
Taking the tech opportunity
There are a lot of digital tools out there that can make sure you get the best out of your savings. A growing number of banks offer apps that allow you to compartmentalise your money into different pots, with each linked to different goals or purposes.