Revitalise your savings
You never know what's around the corner, but there are ways to plan ahead to ensure you don't get caught off guard. Building up a sizeable pot of savings is the best possible way to ensure financial security, whatever life throws at you.
Having a target to focus on will help keep you motivated to save, but the first aim for your savings should be to build up an emergency fund. This will make sure you're equipped to deal with any unexpected expenses, such as car repairs, or a change in your circumstances, such as redundancy. It's generally advised that the size of this fund should be equal to between three and six months of your salary.
The best way to build up a fund like this is to get into the habit of saving regularly, ideally every month. The steps you have taken so far will indicate how much you can afford to save, taking into account your fixed expenses and a budget for non-essential expenditure. Planning to put this sum into a savings account, however, is unlikely to happen unless you have some serious will power.
So, to avoid frittering it away throughout the month, set up a standing order to whip it straight out of your current account and into savings on payday. "This is the most effective way of creating a savings habit," says Philip Pearson, partner at financial planners P&P Invest in Southampton. "Otherwise it is all too easy to spend the cash without thinking."
Finding the motivation
If you have committed to cutting back in a particular area of spending or giving up something for the New Year, redirecting the money you would have spent on these things into a savings account is great motivation to keep going.
The next step is to decide what type of account to save in to boost your money. "It is important to minimise the effect of taxation upon savings," says Pearson. "Without doing so you will not get the full benefit of your savings habit." Growth on your savings will be taxed at your marginal rate, either 20% for basic rate taxpayers or 40% for higher rate taxpayers. However, there is one way to protect your savings from the taxman, in a cash ISA (individual savings account). Everyone can save up to £3,600 in a cash ISA in 2008/09 and your savings can grow free of tax.
"Cash ISAs generally provide the most generous interest rates over alternative deposit accounts, with many providing instant access should capital be required in the short-term," adds Pearson.
When you have utilised your ISA allowance, you have a broad choice between a number of different types of accounts, such as regular savers, fixed-rate bonds, notice and no-notice accounts. The best option for you will depend on a number of factors.
Regular saver accounts for example, usually require you to commit to contributing a certain amount each month in order to receive the advertised interest rate. If you find it difficult to stick to saving a regular sum, such an account is a good way to make you save because you will often be penalised by not receiving interest on any month in which you miss a payment.
However, to find the best saving accounts today check out the Moneywise daily guide to saving accounts.
If you have a lump sum to save that you don't want to be tempted to dip into, fixed-rate savings bonds are a good option because your money is often tied up for a period of between three months to five years to enable it to grow. Again, you can find the best rates with Moneywise's daily guide to saving accounts.
If you are building up your emergency fund or saving for something in the short-term, such as a new TV, an account with instant or notice access will be more suitable.
The final step is to find which provider offers the best interest rate. Best-buy tables on sites such as Moneywise.co.uk are a good place to start because you can compare them all in one place - but make sure you don't get caught out by any restrictions and introductory bonus rates that drop to miserly levels when the period ends.
Now you've got your savings habit in place, it's important to keep it up so you can watch your money grow. Check regularly how your interest rate compares with the rest of the market, and if it's lagging behind, don't be afraid to jump ship to another account. It's your money after all, so make it work hard.
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.
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.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.