Do you want to reach the end of 2015 richer than when you started it? Unless you receive a significant windfall, the only way you are going to achieve this is by saving. So, what better time to start than now?
Little at A Time
Saving isn't about investing large lump sums. Saving is about putting an affordable amount of money away on a regular basis which, over a period of time, enables you to build up a substantial pool of money. A good way to start the saving process is by setting yourself a goal, giving you something to aim for and work towards. For example, you might give yourself the target of saving £10,000 over the course of 5 years in order to buy a new car.
Ways to Save
Alarmingly, figures released by Scottish Widows in 2014 suggest that 1 in 5 people have absolutely no savings at all; that’s 20% of people relying solely on their monthly income. This figure has increased dramatically from the 7% reported in 2011. This could be a result of the current low interest rates offered by banks on savings.
There are alternative places you can save your money though. Aside from starting a deposit account with a bank, pooled investments provide the ability to outperform the low interest rates currently offered, and more importantly, can provide returns above the rate of inflation while maintaining a comfortable level of risk.
A common form of pooled investments is Investment Funds. These come in numerous forms and are managed by investment professionals. They can contain equites, fixed interest securities and property and can be accessed directly or through wrappers such as a tax efficient Individual Savings Account (ISA). They are set-up and run in various forms and can be matched according to a return you’re hoping to achieve and a level of risk and volatility you are willing to accept.
Saving on a regular basis also offers the added benefit of reducing much of the risk that investing a large lump sum can be exposed to. There is no need to worry about timing the market as this is eliminated through pound cost averaging, effectively smoothing out the highs and lows of the stock market over the time you are investing.
To give you an example, saving £100 per month over a period of 10 years means you would accumulate £12,000 in capital. The same amount invested into a pooled investment fund, consisting primarily of equities with an assumed growth rate of 5% per annum cumulative, could leave you with a total including growth of £15,528 after 10 years. Easy access Cash ISAs return just £12,938 (from a rate offering 1.5% per annum cumulative).
Don’t Get Caught Out!
Without any savings we run the risk of being caught out with unexpected expenditures we can’t afford. It can leave us resorting to loans and credit cards to cover these expenses which can be the start of a slippery slope. Start today, by working towards a more comfortable, stress free, wealthier future, and let your 2015 new year’s resolutions be to “start saving”!
Article by Daniel Johnson, Investment Co-ordinator for Charles James Financial Planning Ltd which is authorised and regulated by the Financial Conduct Authority