• Home
  • Budget
  • An introduction to savings and investments

An introduction to savings and investments

In this blog we take a look at how you can maximise your income and growth from your savings and investments.
savings and investments
The terms ‘savings‘ and ‘investments‘ are often used interchangeably. However, the distinction between them is important to keep in mind when deciding which products are best for you.

Savings refer to building up a lump sum of money, often for a specific purpose such as a holiday.

They are usually in a cash product such as a bank account or cash ISA that is easily accessible.

Cash deposits of up to £85,000 are protected by the Financial Services Compensation Scheme (FSCS). If your bank, building society or credit union goes bust, the scheme will refund your money, provided it is an authorised financial services firm which is covered by the FSCS.

Investments aim to make money grow. They are products that could increase in value such as shares, stocks, bonds, funds and property.

However, there’s no guarantee that you money will grow. In fact, there is the possibility of losing some, or all, of your original investment if your product doesn’t perform the way you hope. One of the key characteristics of investing is a certain degree of risk, and this must always be factored into strategic decisions and plans.

There’s no right or wrong option when deciding whether to save or invest. What you choose will depend on your specific situation, goals, attitude towards risk, time frame and the different products available. The following questions will help you decide.

What’s your current financial position?

In its simplest terms, establishing your financial position means calculating your income, assets and liabilities.

You may decide that at the moment is it better to pay off debts rather than start to build your wealth.

If you are financially stable but don’t have any existing savings or investments, a first step could be building up an 'emergency fund' of money that is easy to access. Having 3-6 months of outgoings readily available will provide a decent buffer should you need it.

You may have existing investments or savings and want to make the most of them. 

What are your goals and time frame?

Do you need money for something specific such as a car or wedding? Or perhaps you are aiming for something more general such as a comfortable retirement or helping make sure you are protected should something unexpected happen? The chances are you will have a number of goals.

Once you know what you want to achieve, think about when you want to realise your aspirations.

Goal

Time

Example

Short-term

Less than 5 years

Buying a house

Medium-term

5-10 years

Starting a business

Long-term

10+ years

Funding retirement

Short-term goals are probably better to save for while long-term ones are more likely to be able to withstand fluctuations such as in stock markets or house prices so investing could be more appropriate.

Medium-term goals could be best achieved with either saving or investments depending on the situation. For example, helping your child pay for university could be achieved through saving or investing depending on the age of your child.

Is access to your money important?

As a general rule, if you want quick and easy access to your money, savings are likely to be more appropriate.

Alternatively, if you are happy to commit your money for longer (usually 5 years or more), investments may be a better option.

What’s your risk appetite?

No saving or investment is without some risk. Interest on savings may not keep pace with inflation, the value of shares can fall as well as rise and, in extreme circumstances, financial institutions can go bust.

Your risk appetite will depend on your circumstances. Consider the following:

  • Time frame
  • need for growth
  • how much can you afford to lose ('capacity for loss')
  • personal attitude ('tolerance to loss')

One way to help mitigate risk is to have a spread of savings and investments. Balancing your portfolio will ensure that should one product perform badly, the consequences shouldn’t be too drastic.

Lump sum or regular contributions?

There is more risk attached to investing a lump sum. However, if things go well, all of you money has the chance to grow.

Alternatively, regularly adding to your investments is less risky, as less of your money is exposed to market fluctuations, but may mean it takes longer to reach your financial goals.

Savings and investments at a glance

There are many different savings and investment products available. Here is a brief outline of the most common options.

Savings

Cash ISAs allow you to save up to £15,240 a year tax-free. The annual limit is for both cash and stocks and shares ISAs but you can split your savings in any way. Savings are only tax-free while they are in an ISA.

Instant or easy access savings accounts give instant access to your savings but interest rates are generally lower than other types of saving accounts.

Regular savings accounts offer higher interest rates than instant access accounts in exchange for regular (usually monthly) deposits. There is usually a maximum amount that can be saved each month and withdrawals may be limited. Interest is taxed at your marginal rate of income tax.

Fixed-term deposits offer a fixed interest rate for a set period (usually between 1 and 7 years) provided you keep your money in the account. You know how much you’ll get at the end of the term but if interest rates go up you may lose out compared to other accounts.

Investments

Shares or equities allow you to buy a stake in a company either directly or through a scheme or portfolio. If a company is profitable you may get income from dividends as well as capital gain when you sell your shares. However, if the company performs badly you could make nothing or lose your money. There are also specialist investment companies and schemes which you can buy shares in – Investment Trusts and Exchange Traded Funds.

Unit trusts and open ended investment companies (OEICs) are funds which allow you to pool money with other investors, allowing investors to put their money in range of assets and spread the risk of investment without having to invest large sums of money. They are run by fund managers so there will be fees and charges to consider. There are both active and passive funds, with managers of active funds choosing investments and passive funds, known as 'trackers' or 'index' funds, following a particular market or index. Passive funds usually have lower costs.

Buy-to-let property can give you both a rental income and a profit when you sell it. Income is taxed at your marginal rate and any profits on sale may be liable for capital gains tax.

Fixed interest securities a re loans to a company or government. They are generally less risky than shares but are more likely to be affected by changes to inflation.

Investments products are complicated so it is important to seek advice before making a decision.

Important information

The way in which tax charges (or tax relief, as appropriate) are applied depends upon individual circumstances and may be subject to change in the future.

This blog is solely for information purposes and nothing in this blog is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. ISA eligibility depends on personal circumstances. The value of investments can fall as well as rise and you may not get back the full amount you originally invested.

Contact our adviser team at Assured Wealth for help and advice in this area.





 

 

 

Tags: , ,

Why Choose us

Icon1

Investment portfolio review

Icon2

Cash flow modelling

Icon3

Fully Independent

Icon4

FCA regulated

Icon5

Financial planning

Icon6

Estate planning qualified

Icon7

Pension transfer specialists

Icon8

Occupational pension specialists

Icon9

All types of mortgages

Icon10

Care fee planning

Icon11

Low cost fees

Icon12

Corporate planning

Icon13

Wealth management

Icon14

Retirement planning

Icon15

Inheritance tax mitigation