If you’ve followed the advice in steps 1 to 3 of this guide, you should have a goal – or goals – and feel confident that you can cut your spending by a few hundred pounds a year. Time to put these two things together.
Having reduced your monthly expenditure, the best way to cement those savings is to set up a regular direct debit into a bank account or savings plan, such as a stocks and shares ISA.
Short-term to medium term goals
Match short (months) to medium-term (five years) goals with short-term savings plans. Consider an instant access cash ISA or an instant access savings account. If you have a lump sum to set aside, you could also consider a fixed-term deposit for any period from six months to five years. This might earn you a better rate of interest, although you would be penalised if you then wanted to access any fixed-term savings early.
With interest rates so low, it won’t make a huge difference whether you go for instant access or term deposit rates or ISA/non-ISA rates. However, those savings have been hard won, so make the most of them even if you are only a few pounds better off. Remember also that inflation may reduce the spending power of cash savings.
You might want to consider medium-term investments if you’re saving to pay for something 5 to 10 years into the future.
Over this term, it’s common to see investors go for a wider spread of investments – also known as assets. This could range from cash (instant access and fixed term deposits) to bond funds, through to share-based funds.
See our How funds work video for an explanation of ‘funds’.
Another new investment approach is ‘multi strategy’ investing. Instead of investing in one particular type of asset, or a defined mix of different assets, the investment manager constantly reviews economic conditions. This enables them to generate new ideas for investments. A wider investment team then evaluates these ideas before making specific investments. This type of fund aims to produce returns in both rising and falling markets and to deliver returns with lower volatility than investing in shares-based (also known as ‘equity’ funds). For an explanation of different types of asset, see our June 2015 newsletter .
One approach is to keep the bias towards cash and bond funds if the goal is nearer to five years, and consider taking greater risk if your goals are nearer the 10-year end.
For goals that are 10 years or more away, shares (equities) have historically produced the best return over most long periods. However, the return from shares is not guaranteed and the value can be volatile. Even over longer periods, some investors diversify their investments and keep some savings in bond funds, and some in cash.
‘Multi-strategy’ type funds are another alternative. Stocks and Shares ISA’s allow you to choose a mix of investments within one savings plan.
Regular saving reduces the risk of investing all of your savings when the market is at a high value. That is because you are buying investments at the prevailing price each month, or each year, over a longer period. This means you will buy investments at closer to the average price rather than at the highest price.
Remember that no investment is guaranteed and its value can go up and down. You could end up getting back less than you invested.
Your own attitude to risk
You should consider your own personal tolerance to investment risk. If the thought of your savings falling by a large amount over a short period would make you lose sleep, then perhaps more volatile investments are not for you.
Whatever investment approach you take, make sure that you review your investments regularly to ensure that they still meet your needs.
Step 4: saving