Your saving strategy for 2011: young professionals
Read our 2011 saving strategy for families here
Read our 2011 saving strategy for the recently retired here
Our savings have taken a serious battering over the past year. The average instant access interest rate is now just 0.79%, according to Moneyfacts. Added to this, many of us have been forced to dip into our rainy-day funds.
The average Brit's cash reserve is currently a meagre £1,771, according to ING Direct, which falls well short of the recommended minimum for emergency savings (equivalent to three months' salary).
With a barrage of public spending cuts set to hit in April and more job losses on the horizon, growing our financial safety net should be top of our agenda for 2011.
Yet this idea was thrown into question in September when the deputy governor of the Bank of England, Charlie Bean, surprised us all by suggesting we should be out spreading our cash around instead. Bean told Channel 4 News: "In the short term, we want to see households not saving more but spending more."
Frittering your money away might be good for the UK economy as a whole, but with personal debt standing at an all-time high, getting into a savings habit is surely more important than ever.
So where do you start? As with all financial decisions, the right choice will depend on your personal circumstances.
Here we take a look at the dilemmas facing the young professional, and offer some solutions.
THE YOUNG PROFESSIONAL WITH NAGGING DEBTS
Natasha is a 29-year-old advertising sales account manager. She rents a flat with her sister and is trying to save for a deposit to buy a house with her boyfriend.
She puts away £100 a month into a cash ISA, which has a balance of £2,800 and currently earns a paltry 1.2% AER. She would like to save more but is still trying to clear a niggling £4,000 debt spread across two 0% credit cards by paying £100 a month towards it.
"I want to be debt-free and reach my savings target of £10,000, but I don't feel like I'm getting any closer to either of these goals at the moment," says Natasha.
What she needs to consider...
Currently, Natasha's two goals of saving and paying off debt conflict with each other. As a general rule, saving when you have debts is a false economy – and this is especially the case in the current low-interest climate.
While Natasha has been savvy by transferring her credit card balance to 0% cards to ensure the debt doesn't grow further, it continues to be a financial noose around her neck.
Repaying £2,800 in a lump sum would bring the credit card balance down to £1,200. This could be cleared in just six months if Natasha stopped her ISA contributions for now, enabling her to double her monthly debt repayments to £200.
She would then be completely debt-free by June and able to focus solely on building up her house deposit.
She should then start saving again into an ISA. Although many savings accounts are paying more competitive rates at the moment (for example, Santander is paying 4% fixed for 13 months on savings of £20-£250 a month, compared with the best ISA rate of 3.05% from Northern Rock), because she's a higher-rate taxpayer, an ISA will be better for Natasha. Also, as it gets closer to the end of the current tax year, she should benefit from more competitive rates.
With monthly payments of £200 and a rate of 4%, it will take Natasha just under four years to build up a sum of £10,000.
Expert advice from IFA Anna Sofat
"While Natasha focuses on clearing her debts as quickly as possible, she should also look at her outgoings to see if there's room to make further savings and set a monthly budget.
"It's easy for money to leak away in small, thoughtless purchases, as well as through failing to shop around for products and services, so Natasha could find that reviewing her monthly expenditure would substantially boost her savings."
Our savings advice comes from Anna Sofat, who is a highly regarded financial expert and founder and director of Addidi, a wealth management company in London.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.