It’s a good idea to start saving once you’re earning a sufficient amount, but there are other options to think about when you have some spare cash……. apart from spending it all! 😉
Is it worth saving even when interest rates are low? Should you pay off debts first? Would it be better to put money into a pension? Should you invest rather than save? This section looks at some of the considerations, to help you decide. Always get independent, professional advice for your particular situation.
Low Interest Rates – is it Worth Saving?
When interest rates are low, you may wonder whether it is actually worth putting money into savings. But setting aside a little each month means your money can soon mount up, and give you peace of mind that you have funds available in case of an emergency, or to help towards a longer term goal. And once interest rates start to rise, your lump sum will grow faster.
However, in the current climate, it is important for savers to stay on top of the situation and seek out the best available deals to maximise returns. In addition to savings products, it might be worth looking at high-interest current bank accounts, which can offer decent rates depending on how much cash you keep in your account.
“Savers must not lose hope as there are still providers that want savers’ cash and are willing to pay a competitive return for it”
Anna Bowes (A founder & director of Savings Champion)
Find out more:
Choosing Savings Accounts
Important things to consider when selecting savings accounts
Savings Champion
Monitors & advises on the UK savings market
How to Start Saving – Money Saving Expert
How to choose the right type of account in the right order to maximise your interest: Explains the concept of a savings fountain – putting your cash into the best-paying account, then when that reaches its limit, go for the next best option and so on
Repay Debts or Start to Save?
If a debt COSTS more than you will EARN from savings, you should pay off the debt before starting to save
The interest charged on most overdrafts, loans and credit cards is much higher than the interest you will earn on savings.
Example:
What will make you better off – put £1000 into savings or clear your credit card debt?
£1000 balance on your credit card, charged at 20% interest, will cost you £200 interest this year.
£1000 in a savings account paying 4% interest, would earn you £40 over the same year.
So you would be £160 better off by using your savings to pay off the balance on your credit card.
So the general rule is pay off costly debts before starting to save!
The exceptions are:
- When a debt costs less than you can earn from savings e.g. your Student Loan, which generally charges low interest rates with preferential terms – meaning that putting spare money into a Cash ISA or a high rate savings account could probably leave you slightly better off than clearing your Student Loan.
- If a lock-in clause on a loan means you would have to pay a costly penalty for early settlement, it might not be worth doing.
Find out more:
Repay Debts or Save? – Money Saving Expert
Savings or Pension?
A pension is a tax-free saving plan for retirement.
You, your employer and sometimes the Government contribute to your pension every month and then you receive a regular income when you retire.
When you are just beginning your career, it might seem crazy to think about saving for retirement, but some experts advise that you start investing in your pension as soon as you are earning.
The right time to start saving for a pension depends on your financial situation. Paying into a pension for later means you have less to spend now, and at this stage, you may well have more pressing demands on your money:
- Certainly, if you have costly debts, it would be wise to repay those first (with the possible exception of your Student Loan), before putting money into a pension or savings.
- It might also make sense to set aside some cash in an Easy Access savings account for emergency funds, before starting a pension.
- You may then prefer to begin regular savings towards longer-term larger necessities, like a car, laptop, furniture etc.
It is a question of balancing your priorities, taking account of short-term and much longer-term needs. You receive a state pension related to your National Insurance contributions, but that alone might not provide sufficient income for retirement. Pensions experts recommend that you top it up with a workplace pension or private pension; once your financial position is stable, it’s a good idea to start as soon as you can. If you are unsure about committing straight away, you can always transfer money from other savings into a pension later on.
If your employer operates an auto-enrolment scheme, you will have to opt out if you don’t want to save towards your pension at this stage. However if your employer offers a pension scheme that matches your contributions, it is certainly worthwhile joining as early as possible, otherwise you are effectively rejecting free money!
Find out more:
Pensions – Virgin Money
3 minute film
Pension Need-To-Knows – Money Saving Expert
When & How To Start Saving For A Pension – This Is Money
‘Pension Advice For The Twenty-Somethings: Start Early & Save Big’ – The Guardian (Dec 2013)
Save or Invest?
It’s important to understand the differences:
Save
Aim: You tend to put money aside a bit at a time to build a lump sum, often with a particular goal in mind e.g. a car, a deposit on a home, or to keep some emergency funds.
You put your money into the safest places/products and you get it all back plus interest.
You can have easy access to your money when you need it.
Examples: Bank & building society Easy Access savings accounts, ISAs, one-year fixed-rate bonds etc.
The tradeoff for the security and ready availability of savings is that interest rates are not very high – you won’t grow your money at a vast rate.
Invest
Aim: You invest in order to get a profitable return, by buying things that might increase in value e.g. stocks and shares in a company, bonds, property, or collectibles like art, antiques, fine wines, classic cars etc.
The tradeoff is potentially higher rewards… but greater risks:
- Investing could earn you more than putting your money into savings accounts, but the risk is the value of your assets/investments can go down as well as up – so you might even end up with less than you started with!
A popular route into investing is via a fund, where a professional manager pools together people’s money and invests in a portfolio of different types of assets, which can help spread the risk.
- You generally have to be prepared to put money away for a longer term (minimum 5 years) to smooth out any fluctuations, and accept that there is no guarantee of higher earnings.
So you need to weigh up the potential higher rewards from investing, against the uncertainty and longer time commitment. The choice depends on individual circumstances, but if you don’t want to take any risks with your money, consider whether saving may be preferable to investing.
Find out more:
Investments – Virgin Money
3 minute film
Beginner’s Guide To Investing – Money Advice Service
Are You Ready to Invest? – Which
How investing works, useful tips & types of investment
A Guide to Getting Started in the Stock Market – This is Money
Share Dealing Need-to-Knows – Money Saving Expert
The cheapest way to buy, sell and hold shares
