Savings and Investments
If you find when you’ve completed your budget that you have money left over, you may want to consider investing it for the future. Savings are really important for the long term and specialist savings accounts can be the best way to make your money work for you. There are a lot of different options available so you will need to make sure that you get the right financial product for your needs, and it may be worth getting some independent advice about this, particularly if you want to invest a large amount or have a particular savings goal you want to reach.
Financial advisers recommend that you should have between 3-6 months worth of your usual income saved in an instant access account as an emergency fund in case of unexpected expenses. Before you consider paying into more long term investments it might be worth considering getting this money saved for a rainy day where you can access it at short notice.
The simplest way to save may be through a savings account with your bank. Savings accounts are specially designed to help to save money and usually offer you a better rate of interest on your deposits than a normal account, however you may have to think more carefully about the access you will want to have to your money. Some will offer ‘instant access’ where you can withdraw the money whenever you like, however for others may be ‘fixed notice’ or ‘term’ accounts where you will earn more interest but have to give the bank a certain amount of notice before you withdraw any money.
Investments may be a more risky option but often offer higher rewards. They are more suitable for longer term savings as this can help minimise the risks somewhat. Different types of investment also carry different levels of risk, so you will need to consider carefully what you want to achieve with your money and how much risk you are prepared to take in order to do this. Remember with investments that profit and risk tend to go hand in hand. Anyone who tries to sell you an investment product such as shares by claiming you will make a ‘guaranteed’ profit should be treated with caution as this may be a scam.
Instant Access Accounts
These accounts go by a variety of different names (for instance ‘Easy Access’, ‘No-notice’ etc) and these different names can mean slightly different things, so always check the terms and conditions of the account you are offered carefully before you decide to take the plunge and invest your money. Usually these types of accounts will let you withdraw your money whenever you like with no penalty, but they will not offer you as much interest as fixed notice accounts.
Fixed Notice and Term Accounts
Again these may vary slightly different depending on the individual account. ‘Fixed notice’ accounts usually require you to give a certain amount of notice before you can access your money e.g. 60 or 90 days. With ‘fixed term’ accounts however, your money is invested for a fixed period of time, for instance a year, and you will not be able to withdraw it during this time without paying a penalty, or losing the interest you have earned on it. These accounts usually pay more interest than ‘instant access ‘, however it is worth considering how much you can afford to pay into these sorts of accounts and whether you will be leaving yourself with enough money available that you can access quickly in case of an emergency.
Child Trust Fund
This is a long tern savings account for children born on or after 1 September 2002 but before 1 January 2011. The money saved and any interest earned is all tax free, and a total of £1,200 can be paid into the account each year. Parents should have received a voucher worth either £250 or £50 (depending on when your child was born) from the government to start their child’s account, and if your family receives child tax credits your child may have been eligible for an extra payment. If your child turned 7 before 31 July 2010 they may get an extra payment of £250, which should be paid automatically. If your child receives DLA they may also have been getting extra Trust Fund payments. All government payments will stop from 6 April 2011. (Read more)
If your child already has a Trust Fund you should be able to continue to run in it in the same way, with the only difference being that the government will not continue to make payments into the account. Changes made by the government now mean no more Trust Fund accounts can be opened and instead these will be replaced with a new type of account called a Junior ISA
. For more information see http://www.childtrustfund.gov.uk/
Credit unions are groups of people with a common bond (e.g. they all live in the same area) who come together to save money. This can be a great way to get into the habit of saving regularly, and your employer may be able to arrange to have money paid into your savings straight from your wages, which makes it even easier. Credit unions are run for the benefit of the local community rather than to make a profit for bankers, so any money they make (in interest on loans etc) is shared equally amongst all members. To find out more, take a look at our section on Credit Unions.
ISAs (Individual Savings Accounts)
ISAs are a form of ‘tax wrapper’, meaning you do not have to pay tax on any interest you earn, however again you may not be able to access any money immediately – check with your bank to see what options they offer and which would be best for you. There are two separate types of ISA, cash and investments. You can only pay a limited amount of money into an ISA each year, and only around half of this can go into a cash ISA. Other forms of investments are as always, potentially higher risk, so think carefully and get plenty of advice before you decide what to do. Some more information on ISAs can be found at http://www.hmrc.gov.uk/leaflets/isa-factsheet.pdf
These are another form of ‘tax wrapper’. See our Pensions section for more information.
Also known as equities or stocks, shares are a small part of a company; so when you buy shares you become a shareholder in the company. This may give you certain rights, such as being able to vote on issues to do with the running of the company. (Read more)
There are a number of ways to buy shares: when the company is first starting up they may sell shares through an Initial Public Offering in order to raise money, you can buy shares in an existing company through the stock market
, or you may be able to buy shares in the company you work for through an employee share scheme.
You may then earn a dividend
from the company’s profits, and/or be able to make a profit on your shares when you decide to sell them. Share prices may go up and down dramatically, so they may be regarded as quite a high risk
investment. Generally the longer you hold the shares the lesser the risk, as any variations in the amount the shares are worth will tend to even itself out over time. Be very wary of anyone who contacts you out of the blue to buy or sell shares – this may well be a scam
There are several different types of investment with the words ‘bond’ in their name, however they are all very different. The sorts of bonds we are talking about here are known as ‘fixed interest securities’. These are when you provide a loan to the government, a company or a local authority, and in return you receive an income from the interest on the loan. Bond values may still go up or down depending on a company’s performance and how stable an investment they are seen to be, however bonds are still generally seen as less risky than having a share in company. (Read more)
The main risk is that the company you have lent money to will be unable to afford the interest
or to pay the loan back (usually because they have gone out of business). These risks are often thought not to apply to gilts
(loans to the government), although there have been cases in certain countries where governments have been unable to meet the payments. This means that gilts tend to offer a lower rate of interest than other bonds. As with most other forms of investment, the greater the risk
, the higher the rewards tend to be, so companies with a lower credit rating will tend to offer a higher rate of interest to attract investors.
You can buy bonds directly through a stockbroking firm (you will pay a charge for this similar to when you buy shares). As bond values go up and down on the market, you may be able to purchase them for less than their nominal value
. You can also buy bonds through pooled investments
(see our section below for more information on these). Here, a fund manager will invest your money in a range of different bonds according to criteria you set (such as how much risk you are willing to take etc) and will manage your investments on a regular basis. This type of investment attracts an extra charge for the fund manager’s services.
Investing in property can give you the opportunity for capital growth (if you are able to sell the property in future for a profit) as well as regular income (if you buy a buy-to-let property which you then rent out to tenants. You may wish to consider a pooled investment (see our section on pooled investments below for more information) which invests in a range of properties. These are usually commercial properties (rented to businesses) which means they may be more secure (businesses tend to lease properties for a longer period) and easier to sell if you need to get at your money, although it can still take up to six months and sometimes even longer for an investment manager to sell the property for you. (Read more)
Buy-to-let properties can seem like an attractive idea; however it is important to remember you will have legal responsibilities and there are various difficulties you may run into along the way which you will need to plan for. For instance, the property may be unoccupied for a period, during which time you will not be generating any income, or you may have difficulties with tenants causing anti-social behaviour, not paying rent on time and so on, which can be stressful and time-consuming to deal with. For more information on the sort of problems you may come up against and potential solutions you could try, see http://yourmoney.moneyadviceservice.org.uk/products/investments/types/asset_classes/property.html.
This is where a group of people all pay into a fund which is then invested. This lessens the risk to each individual and can reduce administration and dealing costs. Pooled investments are usually actively managed. This means that a fund manager will look at the market and buy and sell shares in order to try and provide a good return on investments. Pooled investments include investment funds, investment bonds and endowments. Each of these types of investment has different features and is suitable for different purposes. For more information on pooled investments see this site.