Saving needs to be a habit that you need to start as early as possible. Without it you will not be able to create wealth, buy large items without taking on debt or place a deposit for buying a home. Cash is king and can always be used as a negotiating chip to secure a bargain or take advantage of offers or sales, so enhancing your lifestyle.
All you need to remember is that saving is simply a deferment of enjoyment! You are putting off spending the money until a later date.
The biggest hurdle is starting the habit. Some habits are easy to start as we gain a perceived pleasure. However, savings do not provide that feeling until we use the savings to buy something. The earlier that saving starts, the easier it is to reach a target, as the saving will be spread over a longer period.
Once the commitment to save is made, it is best to automate the process, by standing order to a tax efficient account. The amount you save should be decided after you have completed a budget plan, decided how much you can (and should!) save and start saving from the next pay day! The easiest way to do this is to look at what was left at the end of last month, then save that much this month, but from day1!
Some workplaces have savings schemes available. These are good as the cash is taken out of your pay before it is given to you.
Types of savings account
Initially you need to save a fund that could provide you with cash in the event that you have an emergency. This needs to be held in an easily accessible account.
Once you have a sufficient amount for emergencies, say 3-6 months’ pay, you should then consider longer term accounts. Some saving accounts pay higher interest rates; longer term accounts will also pay higher rates – with the benefit that the money is out of reach! We are less likely to access an account if we lose interest than if it is readily available. So if you are likely to be tempted, use a longer term account.
And don’t forget to save into an ISA if you are a tax payer. If you don’t pay tax or your income is lower than the personal allowance, then you can apply for tax free interest using this form.
Once you have saved enough to provide you with that all important safety net, deposit for a home or other capital item, you are ready to start long term saving.
Long term saving usually means making your money work harder, achieving better returns than cash on deposit. It also may mean taking an element of risk. Taking risk is part and parcel of achieving a better return.
Risk comes in many forms, the main one we think about in the savings area is the stock market. However, there are other investments with low risk, higher risk, longer term risk, short term volatility, geared investments, pooled investments and more. You could invest over the longer term and, as well as stock market investments, could have Peer to Peer lending accounts, government Securities, residential and commercial property, land and forestry.
There are many investments to choose and those that you decide to invest in will depend on how much risk you want to take for the return you expect, how long you are considering investing for and how volatile the investment will be over time.
The type of investment you choose should never be made on the basis of whether it is tax efficient. The most important thing is the potential return. After that, you need to make the return as tax efficient as possible.
Therefore, you need to consider investments that give you a tax break, such as an ISA or a Pension, your home or a collective investment. In addition to more ‘standard’ investments, you may wish to seek higher returns by investing in Venture Capital Trusts, Enterprise Investment Schemes or Inheritance Tax Schemes. All these and other arrangements have beneficial tax reliefs that make the investment in them more tax efficient, but with additional risk in exchange!
Use of Trusts
Once wealth has been built up, we will want to pass this on to our family in a tax efficient manner. This can be done by using trusts or trust based investments. We liaise with solicitors to create trusts for Inheritance Tax mitigation and then invest the money in them to provide returns that make the planning very effective.
Alternatively, we use trusts created when clients invest in collective schemes. Often these are structured to allow clients to use the Inheritance Tax rules to their favour, which often has strong planning reasons for using them.
The Financial Conduct Authority does not regulate will writing and taxation and trust advice.