Written by: Cally Worden
‘Savings!’ Remember that word? With the credit crunch and austerity taking centre stage in recent years, the idea of having a few pennies to put away for a rainy day has felt like a distant memory. This WAS the rainy day. But with a glimmer of light starting to appear at the end of that very long, dark tunnel for some families, it may be time once again to think about saving, and the best way to make your money work for you.
What are your Motivations?
The best choice for what to do with your spare cash may depend on what you intend to use your savings for. Are you thinking of a rainy-day pot that will be ready if and when you need it? Or do you have some other long or short term plan? Perhaps you are interested in saving for a deposit, paying off some of your mortgage, or creating a pension fund? Whatever your plans you need to consider:
- how much risk you are prepared to take with your money
- how accessible you need it to be
- whether there are any tax implications to your savings plan
When you know the answers to these questions, you will be in the best position to select your route to savings success.
Short Term Savings
Time is usually crucial in any savings decision, and short term savings are usually taken to mean those that you will want to access within the next 5 years. This is useful for such things as Christmas, holidays, a house deposit or a new car. You want to be able to access your money when you have saved enough, which makes Banks, Building Societies and National Savings and Investment Accounts a popular choice. An ISA or standard Savings Account both work well in the short term. These types of savings are generally very safe and your money can be reached within a very short period of time. The only downside is that the interest you earn may be lower as a result of the virtually risk-free nature of this type of savings plan.
Long Term Savings
If you are thinking ahead to the future, beyond the 5 year mark, then you may be mulling over how to save of a college fund for the kids, or perhaps preparing for your retirement. For these scenarios having quick and efficient access to your money is less important. What drives you decision on where to invest here is how safe you want your cash to be, and the degree of risk you are willing to accept. You can still invest cautiously in a Bank or Building Society of course, but could potentially make much more of your savings if you are prepared to dip a toe into the waters of the Stock Market.
The Amount of Your Savings
Money makes money – this has always been true, and is stands to reason that the more you have to invest, the more you stand to gain. This does not mean that all is lost if you can only afford to save a little at a time, however – we all have to start somewhere, and it’s surprising how a little cash here and there can quickly add up to a sizable sum. Regular savers can benefit from good interest rates by committing to a regular monthly investment into a standard savings account.
If you have a lump sum to invest, perhaps from a bonus at work, money from a house sale, or an unexpected inheritance, then you need to look at the interest rates offered by banks and building societies. While special savings accounts may offer a higher interest rate in the short term, regular savings accounts can also offer very attractive rates – it may pay you to place a lump sum into a special savings account first, and then gradually transfer it in regular monthly instalments into a regular savings account, gaining the benefit of both deals. Be aware the some accounts only offer high rates of interest for a limited period, and you may need to keep moving your lump sum around to be sure of making the most of the deals on the market over a prolonged period of time – look out for early removal penalties too.
Depending on how much money you have it is not wise to place any more than ¬£85k with any single bank or building society, as the government only offers protection for funds up to this level for each institution. With a lump sum you could also invest in a stock market portfolio that spreads your risk, or consider splitting the lump sum between some short and some long term investments. Shop around, take advice, and find a way of placing and managing your money that works for you.
Anyone paying tax in the UK has to pay income tax on any interest earned from savings. An ISA is a tax-free savings account into which you can pay up to a set amount each year as cash, or an investment in stocks and shares. The limit on how much you can invest changes each year. Another method of tax-free investing is to use National Savings and Investment certificates.