Your saving strategy for 2011: families
Read our 2011 saving strategy for young professionals 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 working family, and offer some solutions.
THE WORKING FAMILY
Thirty-somethings Carrie and Simon are married and have a three-year-old son, Jacob. Simon is a quantity surveyor and Carrie, who is pregnant with their second child, works part-time as a social worker.
The couple have a large mortgage that is currently on a tracker deal. They have benefited from low rates over the past couple of years and have made several overpayments, but are worried about how they will cope if rates start to rise.
They will also be hit by the chancellor's cut in child benefit and want to prepare their finances for tough times ahead by saving an additional £100 each month.
"We're expecting our household budget to be squeezed in light of government spending cuts and rising interest rates, and want to know how best to prepare for our growing family," says Simon.
What they need to consider...
The biggest concern for Carrie and Simon is ensuring financial security for their young family. While making overpayments has helped to reduce their mortgage term, they should now focus on their immediate financial needs.
The benefits of being on a tracker mortgage could end if rates start to creep up and they face rising payments and a squeeze on their income.
To fix or not to fix is a common dilemma for homeowners. While interest rates are expected to remain low to the end of 2011 (and maybe longer), if Simon and Carrie would struggle to cope with a rise in their mortgage payments, they should opt for the security of a fixed-rate deal.
Fixed-rate mortgages are currently about 1% more than trackers, but rates are beginning to fall and there are some great rates for homeowners with a large amount of equity.
The couple should direct their £100 a month towards starting or growing an emergency savings fund. Their household income will dip when Carrie goes on maternity leave, so they need to prepare their finances for this change. They should aim to build up emergency savings equal to six to 12 months' expenditure and keep it in cash so they can access it easily.
Expert advice from IFA Anna Sofat
"Simon and Carrie should use their ISA allowances to ensure that they are getting a tax-efficient return on this cash, especially as Simon is a higher-rate taxpayer. One of the more consistent cash ISAs is from NS&I, currently paying 2.5%.
"When they have a decent emergency cash fund, I would suggest they consider a regular saving stocks and shares ISA. This is a useful and tax-efficient way of accumulating medium-term savings (for a minimum of five years). The money is accessible but by contributing each month, the couple will benefit from 'pound cost averaging'.
"This basically means that the continuous drip-feed method of investing will allow their monthly contributions to buy fewer shares or units when prices are high, and more when prices fall."
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.
With a tracker mortgage, the interest you pay is an agreed percentage above the Bank of England’s base rate. As the base rate rises and falls, your tracker will track these changes, and so rise and fall accordingly. If your tracker mortgage is Bank of England base rate +1% and the base rate is 5.75%, you will be paying 6.75%. Tracker rates are lower than lender’s standard variable rate (SVR) and as they are simple products for lenders to design, they usually come with lower fees than other mortgage schemes.
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.