Amidst the current uncertainty on the market, it can be hard to know how best to manage your money. With ISA interest rates currently at a low, you may be wondering whether to stick with one or move your money to an alternative option. You might even be considering investing.
It’s important to understand what’s on the market and the potential impact of each choice in line with your own circumstances. Here we’ll cover some of the investment and saving options available to you.
Savings vs investments
The age-old question of whether you should put your money into savings accounts or investments doesn’t necessarily come with a straightforward answer.
Saving is the right option if you’re going to need to access your money in a relatively short time – typically in the next five years. But it’s not without its drawbacks. While holding cash might seem like the safest option (and one that makes your assets feel more tangible), the reality is that inflation causes the value of your cash savings to fall.
As the cost of living rises and interest rates fail to rise alongside it, your cash will be able to purchase less and less over time. For example, if you’d placed £30,000 in a savings account in 2000, following almost two decades of average inflation of 2.8% a year, your savings in 2019 would need to be £50,876.75 to boast the same spending power.
So, to avoid the buying power of your savings being reduced, you might want to consider an alternative.
Investments are more applicable for the long-term – typically anything over five years. A benefit of investing, rather than holding assets in cash, is that you have an opportunity to increase the value of your money by beating the pace of inflation with returns.
But investing comes with a risk; there’s volatility involved in the short-term and you can’t ever guarantee returns, so it’s essential that you consider your risk profile before making a decision.
It’s important to state that savings and investments aren’t binary. The decision to save or invest must ultimately be aligned with your financial goal. If you’re going to need to access your money within five years, saving is the better option for you. If you’re happy to leave your money untouched for five years or more, you might want to consider investing.
If you’re considering saving…
The truth of the matter is that you’ll need to work your savings hard in order to get the most from them, particularly in the current financial climate. With that said, here are our three top tips for those interested in saving:
1. Shop around
In order to get the best interest rate, it’s essential to shop around and be prepared to switch. There are plenty of options available, so it’s a case of doing your research.
National Savings & Investment (NS&I) products tend to be considered a safe bet; as they’re backed by HM Treasury, your money is totally secure and won’t lose value.
Premium Bonds are a popular NS&I product, in which each £1 bond you own is entered into a monthly tax-free prize draw of up to £1 million. It’s important to note you won’t earn any interest as such, but rather the interest funds the prize draw. It’s a great option for those who enjoy the thrill of a potential win, but the odds aren’t great and you won’t be making any returns.
2. Use a Cash ISA
ISAs were first introduced with the notion of making saving simpler and are now considered to be an essential part of a financial plan. They can help you make the most of your money and minimise tax.
A Cash ISA is very similar to a standard savings account with a bank. The difference is that all of the interest you earn is tax-free – so you ultimately keep more of your money. As mentioned above though, interest rates in recent years have been notably low and not in keeping with the rates of inflation, which can have an impact on the value of your savings in the long-term.
3. Choose an account with bonus rates
Some accounts will offer to pay bonus rates, giving you a welcome boost on your returns. An example of such an account is a Lifetime ISA, which is designed to support people looking to buy their first home or supplement their pension savings.
Most bonus rate deals come as part of an introductory offer, so it’s important to review it before your deal finishes to ensure it’s still competitive.
If you’re considering investing…
As discussed previously, you should only consider investing if you aren’t going to need to access your money within the next five years. If you do fall into this category, here are our three top tips:
1. Use a Stocks and Shares ISA
With a Stocks and Shares ISA, the capital and income generated from your investments are protected from tax, so you can effectively beat the impact inflation has on your savings.
You can invest in a range of qualifying investments, including government and corporate bonds, and start to build a portfolio that reflects your risk profile.
2. Consider your time horizon
Your time horizon is how long you are willing to invest in order to reach your goal. The longer the horizon, the more likely you can ride out any turbulence in the market – which tends to be an inevitable part of investing.
3. Seek financial advice
Ultimately there’s always going to be some risk associated with investing, so if you’re unsure of your options (or which one to choose) you should speak to a financial adviser. They will be able to recommend the right course of action for your personal circumstances and could provide you with more options than if you were to arrange matters yourself.
Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.