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Would you like to feel calmer about money? A key step to achieve this is to save. Having a store of wealth helps provide peace of mind, since you have an “emergency fund” ready to draw from during hard times (rather than being forced to turn to credit). Saving also gives you a sense that you are moving towards your goals, rather than just living “paycheque to paycheque”. Yet how do you save effectively for the future – especially with the cost of living, taxes and poor habits holding you back? In this article, our financial planners offer some thoughts to help savers in 2023. We hope this is helpful to you. If you want to discuss your own financial plan with us, please contact our team for more information or to access personalised financial advice:
020 8366 4400 or enquiries@cedarhfs.co.uk
Establish your goals
What are you looking to save for? Having a clear target will help you know what to aim towards. You might have multiple goals. Perhaps one is to save for a house deposit; another is to build an emergency fund (6 months’ worth of living expenses) and the third is to save for retirement. Here, a different strategy will likely be required for each goal given the time horizons involved. Saving for a house deposit, for instance, is likely a shorter-term goal within the next 3-5 years. Retirement, however, might be decades away. In particular, the first might necessitate saving more into “safer” assets like cash or UK government bonds (gilts). With the second, however, you could potentially take on more investment risk – e.g. investing in “growth shares” – since you have more time for your portfolio to recover from market shocks and falls.
Tighten your budget
How much can you realistically afford to set aside each month towards your goal(s)? This will require a careful look at your monthly budget. Take a close look at your spending on household bills, the mortgage (or rent), food and leisure. Are there ways to get a better deal, say, on your housing costs? Perhaps downsizing or remortgaging could reduce your monthly expenses here. Another idea might be to change your commute – e.g. walking, cycling or working more from home. Being more mindful of your buying habits for food, clothing and fun can also help produce savings which can then be committed towards your goals.
Use tax-efficient vehicles
A range of schemes exists to help savers boost the power of their contributions. Those looking to save for a property deposit, for instance, might consider the Lifetime ISA (or LISA). This lets you save up to £4,000 per year, with the government “topping up” your contributions by 25% (up to a maximum of £1,000). This is, in effect, a 25% guaranteed return on investment – even setting aside any interest, dividends or capital gains which you may produce (which will be tax-free due to being inside an ISA “wrapper”).
Those looking to save for retirement, however, would do well to consider using a pension. Here, you can contribute up to £40,000 per year under the “annual allowance” rules (or, up to 100% of your earnings – whichever is lower). Your contributions can also receive tax relief equivalent to your highest marginal rate of income tax. For a basic rate taxpayer, therefore, it only “costs” you 80p to put £1 into your pension. For someone on the higher rate, the cost is 60p.
If you are looking to build up an easy-access emergency fund, a pension or Lisa will likely not be appropriate. Instead, you might do better to consider regular savings accounts, other ISAs (e.g. cash ISAs) or Premium Bonds. A financial planner can help you explore the options here.
Design an appropriate portfolio
As mentioned above, your time horizon plays a key role in whether you should put money into cash, bonds, equities and/or property – and to which proportions. However, other factors are key to how you construct your portfolio for each goal. Namely, your risk appetite (or tolerance) and your investment strategy. The former represents how much investment risk you are comfortable with. For instance, there might be more growth potential in committing 100% of your portfolio to equities over, say, 40 years (i.e. to save for retirement). Yet if you think there is a high chance of you taking your money out of the market during a “crash”, it will likely be better to choose a less “adventurous” asset allocation and perhaps spread your capital outside of equities (e.g. 20% or 50% equities to bonds).
Your investment strategy represents what you want your savings to do whilst they are being “stored” for the future. Some people simply want their savings to grow and are not looking for them to produce an income in the meantime. Others, however, might want their investments to help support their lifestyle. If so, this latter person might want to consider income-producing assets for their portfolios such as bonds and dividend-paying shares. The former, however, may want to concentrate more on “growth shares” – i.e. companies which plough their profits back into their businesses to help expansion.
Conclusion
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk