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Develop a saving habit

There are few things in the realm of asset management that are as important as developing a saving habit. You can start today, no matter how much money you make.

Many people look at their finances and become discouraged because they can’t save a whole lot right now. However, anyone can save, and can do so at any point in life. It’s not how much you put away, but rather that you actually get round to doing it.

Developing the habit, no matter how small to begin with, will ensure that you set money aside regularly, and as you begin to make more money, you can set more of it aside. As you start saving you will develop a real interest in seeing the balance of your savings account growing each month. Although it may not sound worthwhile, saving as little as £20 a month will add up as you continue to save over a long period of time.

You should start by determining how much you can save each month, and a good way to do this is to develop a budget of your income and expenses. Then, set yourself a realistic initial goal; for instance, to save £300 in three months. If by the end of the three months you don’t have £300, it should be easy to see where you need to readjust your saving and spending.

Next, create specific financial goals. These should be categorised as “short term”, “medium term” and “long term”. Short term goals can be obtained quickly and do not require a large amount of money. Examples could be saving for a holiday or a down payment on a car. Medium term goals require more money and are usually not for the immediate future but a couple of years down the road. Examples could be saving for a down payment on a house or planning a home improvement project. Long term goals may not require more money than medium term goals but do require longer term commitments. Examples could be saving for a young child’s future education or planning for your retirement.

Where can you get the best return?

The answer to this isn’t always as straightforward as it may seem. Getting the best return isn’t always about headline grabbing interest rates as, once tax is factored in and any bonuses expire, a great account can soon become a poor one. And while interest rates are undoubtedly an important part of choosing a home for your money, you also need to access it in a way that suits you.

High Street help for the short term

In general, regular savings accounts are a good place to look as banks and building societies often offer high interest rates to new customers. However, it pays to do some research first, as this type of account can also come with a whole plethora of restrictions that govern how much you can pay in and how you can access your money.

With instant access accounts, you can get to your money as and when you need it. Look for one that pays a consistently high rate of interest rather than one with bonuses that inflate the interest rate for a short while and then drop. Accounts with rate guarantees are also worth looking at as they give you the confidence that your money is getting a good return until a certain date in the future. Internet accounts are convenient and often offer excellent returns.

However, some of these are with foreign banks so you should be aware that if they were to fail, compensation may be different to that offered to UK savers. Frame it for the medium term. Bonds and fixed term accounts usually offer a better return than instant access accounts and some attractive rates of interest are available for those who don’t mind tying their money up for a while.

However, if you are likely to need your money at all during the specified time frame then be aware that the interest penalties typically associated with mid-term withdrawal will usually outweigh any benefit earned from the higher rate.

Lock it in for the long term

Ask yourself whether you can cope with the idea of your investment losing money or would you panic if the stock market dropped and take the lot out? In long term planning, the level of risk you wish to take with your money will fundamentally shape the types of investment you need. If you want a higher reward, you would have to be prepared to take a greater risk.

If you want the value of your investment to fluctuate less you need to take less risk and expect a lower reward. Finding the correct balance between the elements of risk, reward and volatility is an integral part of finding investments that suit you, and this is where my professional advice will come in as there are also other factors you need to take into consideration:

• Is your priority growth or providing a future income? Investments come with different taxation regimes and charging structures depending on their use.
• Will you want to utilise your future Capital Gains Tax (CGT) allowances or mitigating a potential Inheritance Tax (IHT) liability?
• Are you planning to retire abroad? Expatriate finance is a highly complex subject requiring specialist advice.

Once you develop the habit of saving you will find that it comes easier to you. And it can provide peace of mind, since you know that you will have backup in times of financial strain. We have a range of savings schemes and ideas we could discuss - call us for advice.

This article was taken from Seneca Reid's Spring 2009 newsletter.

Seneca Reid Ltd is an appointed representative of Openwork Limited which is authorised and regulated by the Financial Services Authority.

The information on this website is for the use of residents of the United Kingdom only. No representations are made as to whether the information is applicable or available in any other country which may have access to it.

Openwork Limited offers insurance and investment advice on products from a limited number of product providers and advice on mortgages representative of the whole market.