Given all the financial and economic uncertainty of the past few years, anyone thinking of seriously saving – whether for retirement, a rainy day or a special purchase – has much to think about. To build that special nest egg, you must do some considerable groundwork first. Here are five top tips to help you make the most of your savings.
1. Pay yourself first
One of the biggest stumbling blocks for anyone wishing to save a substantial sum comes when they leave it too late in the month. It’s not enough to think you can see what’s left at the end of the month, and then squirrel it away. Your savings should be your priority payment: decide how much you wish to save each month and set up a direct debit or standing order for regular deposits to your savings account. That way you won’t be tempted to spend the money first and ‘make it up next month’.
Don’t put all of your eggs in the one basket. There are many different savings and investment products available, from regular savings accounts to savings bonds and cash ISAs (Individual Saving Accounts). Each comes with its own terms, interest rates and degrees of accessibility. Spread your money around different institutions to benefit from the Financial Services Compensation Scheme. In the unlikely event of a bank failure you will not be risking everything in one place.
3. Protect your assets
Legitimate financial institutions are regulated by the Financial Services Authority, and certain types of account are covered by deposit insurance – be aware of the different levels of cover between British and overseas banks. If your nest egg exceeds £85,000 you should seriously consider splitting it across multiple accounts with different institutions. Always double check with the FSA to see if any institution is regulated.
4. Balance returns against risk
Bank interest rates are currently low compared to historical averages, and many people are tempted to invest in the stock market instead. This can generate higher returns, and using a stocks and shares ISA can make the process easier, but there is always a risk to the capital. If your targets are long term, this may be a possible option for you. The tax protection of an isa package is valuable, and even if you don’t gain enough to be taxable the paperwork is simpler, with no tax returns to file. Consider taking professional advice if you have never invested in shares before.
5. Think about the accessibility of your cash
The big question is: when will you need the money you have saved? Can you afford to lock it away to earn higher rates, or could you need it at any time as an emergency fund? Consider long-term accounts which offer better returns on money which is locked away for a number of years, reducing the temptation to spend it prematurely, but also have some in easy-access accounts in the event of an emergency, that you can withdraw without incurring any penalties.