Invest for your family's future
New Year, new you. Sure, you've heard it before. But the start of a shiny new year invites the opportunity to adopt a healthier lifestyle. This includes improving your financial health.
Cash savings are important for what is affectionately referred to as a ‘rainy day' account. But for a longer-term commitment, experts maintain that to secure your future finances you need to invest in equities.
Even with interest rates looking set to rise much sooner than was first indicated by the Bank of England, savings rates have a long way to go until they start to generate a decent income.
Many savers place money into funds that pool money across hand-selected stocks with that of other investors, which enables them to spread your investments - rather than investing in individual stocks directly.
In fact, more and more people are investing their money as confidence in the stockmarket grows.
In September, the amount of money ploughed into equity funds reached a peak for the third quarter of the year not seen since 2000, according to the latest figures released by the Investment Management Association.
Around £1.3 billion was pumped into equity funds in September alone.
Investing in equities is the right choice for a long- term investment plan – even for cautious savers.
Part of the problem for many families is finding the cash to spare each month. Yet experts maintain just £50 a month can make all the difference. Squirrel that away for three years and it would be worth £1,980 in today's money, according to calculations by IFA Chase de Vere, assuming the fund grows at 6%, after charges.
Throughout the course of this year, Moneywise will be tracking the progress of three households as they navigate the investment landscape. In this first meeting, we're going to get to know them, find out what their objectives are and how they're planning to invest.
Next time, we'll find out how they get on and if they've been able to keep their new savings and investment regimes on track.
THE YOUNG FAMILY: SOPHIE AND ADRIAN BLYTHE
Sophie Blythe and her husband, Adrian, have recently started a savings drive to pay off the capital part of their mortgage.
The couple, who live in Chelmsford, Essex with their children Harriet, seven, and Finley, three, took out an interest-only mortgage eight years ago and have been able to save a limited amount while they have been paying large childcare bills.
Sophie, 38, who works part-time as a project manager at a charity, says: "Until recently, we didn't save regularly at all – aside from into workplace pensions - because childcare took all of our spare cash. At one point, we were spending £1,000 a month on childcare. This has dropped to £600 a month now that Finley gets 15 hours a week free childcare. When he goes to school full-time in September, we will free up all that cash, which we plan to save."
Until then, the pair, who are both basic-rate taxpayers and have a joint annual income of around £55,000, have decided to part with £100 a month to kick-start a savings fund.
Sophie and Adrian, 39, a paramedic, are invested in the M&G Global Dividend fund. The manager selects stocks to build a portfolio that can perform well in a variety of market conditions. It's a multi-cap fund investing in companies from developed markets around the world. The manager also focuses on companies that can consistently grow their dividend yield rather than those that simply pay a high yield – sustainability of the dividend yield is more important in his view.
The fund has produced good returns, outperforming its peers ￼over one, three and five years, according to data from FE Analytics. Sophie and Adrian chose not to see a financial adviser and instead did their own research before using financial broker Chelsea Financial Services.
Sophie said: "A friend of mine was a client so I looked at their list of preferred funds - called the Core Collection – and selected the M&G fund from there.
"At the moment, the sums we invest are relatively small and I don't feel we have enough cash to spend on professional advice. But once we have more to invest, we will certainly think about it.
"We are looking forward to building up a substantial ￼investment portfolio that we can spend on paying down the mortgage. We would also like to extend our home because it's cheaper than moving."
THE SECOND-STEPPERS: DAVID AND TUI MESSITER
David Messiter and his wife, Tui, have made a New Year's resolution to replenish their savings, having all but emptied their nest egg to buy a new family home at the end of last year.
David, who runs his own IT company, moved with Tui, who stays at home to look after their daughters Lila, five, and Amelia, one, from Essex to Norfolk.
"We moved from a two-bedroom property to a four-bedroom house, which required spending 80% of the savings we had built up over the past eight years," he says.
"It wasn't just the cost of the house – we had to buy much more furniture, having up-sized from a very small place. But Tui's family live in Norwich, which means we will have more support with childcare. We have lots of friends who live here, too."
David, 40, who is a higher-rate taxpayer, adds: "Our savings are rather depleted now and so the plan for the New Year is to replenish them."
He says he has learnt lessons from his previous investments, made through Fidelity. "My successes over the past eight years were mostly down to investments in emerging markets. I bought a China fund very early on and turned pretty much every £1 into £3.50, which boosted the fund. I do plan to put more money into emerging markets this year but not quite so aggressively.
"I will avoid some previous mistakes. I invested into a Russian fund that really struggled. I think I lost a bit there."
David believes Europe and the UK are due a "stonking recovery". He says: "There are so many possibilities for growth. I am interested in the Fidelity Moneybuilder UK Index and Fidelity Global Dividend. I also plan to invest in China and Japan."
David receives quarterly bonuses, so he invests lump sums throughout the year rather than taking out a monthly savings plan.
"My next bonus is paid soon, so I will invest the remaining amount of my Isa allowance, which is about £2,500, and the rest will have to wait until the allowance is refreshed in the new tax year this April," he said.
While the Messiters have only just moved, David said they already have plans to extend. "We will need to build up another pot of money as we would like to do some work on the house to add more open-plan living space for the girls and open out the back of the house into the garden."
THE NEWLYWEDS: ALEX AND MELISSA DUDLEY
Newlyweds Alex and Melissa Dudley, both 29, are planning to save hard for a deposit for a house in London. The couple, who married in June last year, dipped into their savings to pay for the wedding. Now they want to get on the housing ladder but they know they have a difficult task ahead of them.
The pair, who are both higher-rate taxpayers, are currently renting a house in Wandsworth, south-west London, Alex, a management consultant, said: "It is really hard saving while you’re renting - especially in London. Then there’s the added challenge of house prices escalating in London far quicker than anywhere else in the country."
Alex is planning to save around £1,000 a month into a stocks and shares Isa. But he won’t be able to save more than the £11,520 annual allowance and this could be a risky strategy if they plan to buy soon.
"We don’t have a long investment time horizon but keeping money in cash is just not an option – we are losing money in real terms by doing this. Instead I want to invest in Britain by buying UK funds," explains Alex.
He says he believes in the UK growth story. "The economy is picking up and the growth figures prove it. Small companies will do really well in this kind of environment, so I am going to invest in the Marlborough UK Micro Cap fund."
This fund holds small companies, some of which are Aim-listed. The tax planning advantages of Aim stocks were strengthened in August when they were made Isa-allowable.
Alex also wants to back the Henderson UK Absolute Return fund, which has a track record of producing positive returns, even in falling markets. It invests in large financial companies, as well as energy and utilities.
"I know we might be missing out on opportunities outside the UK but by staying close to home we can keep an eye on what’s happening more easily by keeping up with the business and financial news," he says.
"It would be great if we can save a decent amount in 2014 so we can get on the housing ladder. But we are not putting too much pressure on ourselves to do it this year. But if we could, it would be a bonus."
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
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.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
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.