I have a big financial confession to make. I am not a keen cash saver. I am more of a Stocks and Shares Individual Savings Account (Isa) and pension individual – and have been for quite a while.
Cash saving has been a key component of my financial life over the years – helping secure a family home in my early 30s – but the habit has become less important as I have got older. It has also become less appealing.
The trigger for my personal finance sea change was the awful financial crisis of 2008 and the subsequent fall in the Bank of England’s base rate from 5.5% to 0.25%. It turned me off cash saving and any thought of securing a halfdecent income from a building society or bank savings account. Despite last November’s increase in the base rate to 0.5%, I have yet to be tempted back to cash.
Of course, I have an emergency cash fund for when tax bills must be paid (all too regularly, it seems) or an unexpected big household bill comes in, but I am not tempted by a Cash Isa or paying into a monthly savings account. I would rather use any spare money to accumulate wealth in a different, albeit slightly riskier, way: through investing in a Stocks and Shares Isa and ensuring I am pushing as much money into my pension as I possibly can.
On occasion, I have also used any surplus money to overpay on my mortgage. Sound common sense, given the interest rate on my home loan is higher than any rate I could secure from a savings account.
Maybe I will reassess my financial strategy when the base rate ratchets up again. Indeed, May could well see another rate rise, to 0.75%, which should result in higher savings rates. And with inflation seemingly on the way down – a result, primarily, of a stronger pound and lower import costs – cash savings could start becoming a little more attractive. Especially given I will be able to shelter a big chunk of any savings income through use of my annual personal savings allowance, which stands at £500 (I am a higher-rate taxpayer – if I were a basic-rate taxpayer, the allowance would be worth £1,000, while additional-rate taxpayers don’t get anything).
For the time being, the main source of income from my savings and investments will come from the investments I hold within my Isa. But rather than taking this income, I will continue to automatically reinvest it so that I can build a bigger investment portfolio for a time in the future when I need to draw an income. Probably when I retire or more likely move out of full-time employment and work on a part-time basis. I can then draw income from my Isa to supplement any work income.
My Isa investment strategy is simple but based on equity income. I buy shares in income-friendly investment trusts once a month. These trusts are solid and dependable in terms of long-term investment performance and are either invested in the UK stock market or worldwide.
There is nothing sexy about them. Most have been around since time immemorial and have rather weird and wacky names (Alliance, Monks, Scottish Mortgage and Witan). But, reassuringly, they have records of unbroken growth in annual dividends stretching back more than 40 years. The trusts I buy are all drawn from the Dividend Hero list compiled by the Association of Investment Companies, a trade body for investment trusts. Take a look at: Theaic.co.uk.
Although savings income is currently not important in my life, it is a key factor in the financial lives of my three sons, all in their early to mid-20s – and for that matter, many millennials. The two eldest, Mark and Matthew, are desperately attempting to squirrel away enough cash so that they can buy their own homes.
I encourage them to shop around for the best savings rates, using rate comparison information from the likes of Moneyfacts and Savings Champion. I implore them to think outside of the box, which in savings circles means being willing to save with some of the lesser-known deposit takers – the new kids on the block (the likes of RCI Bank, Shawbrook Bank and Secure Trust – the latter two protect up to £85,000 under the Financial Services Compensation Scheme, while the former covers up to €100,000 (£86,380) under the French deposit scheme). I also urge them to look at Help to Buy Isas and Lifetime Isas as tax-effective ways to help them get a foot on the housing ladder.
Do they listen? What do you think?