Saving money is usually a difficult task for many households, but the past year has been an exception. Millions of people have been able to save more than ever before, simply because they couldn’t spend what they normally would.
All those forgotten meals, vacations and travel expenses add up. Savers set aside an average of £ 7,032 last year, according to comparison site MoneySupermarket. Of course, not everyone was so lucky.
For those who have managed to save, it’s understandably tempting to splash. But what about setting aside some savings and using them to boost your wealth in the long run? We asked investment experts what they would do with a windfall of £ 7,000 to help it grow.
Difficult times: all those forgotten meals, vacations and travel costs add up
FIRST TOP-UP OF YOUR EMERGENCY FUND
Many households have simply allowed their locked-in savings to accumulate in their checking accounts. With interest rates so low, sometimes it doesn’t seem useful to transfer them to a savings account.
However, the rates on Isas savings accounts and cash can be pitiful, but many are still several times higher than those on checking accounts. However, you will need to choose carefully to get the best deals.
If you don’t need to access your savings anytime soon, consider a fixed-term savings account, which will reward you with higher rates for keeping your money locked away. Eleanor Williams, finance expert at Moneyfacts, savings expert, also suggests looking to lesser-known brands, such as the challenger and Islamic banks, as they offer many of the best rates.
“It would be a good idea to keep a close watch on the highest rate tables, as some attractive rates do not have very long retention periods, so savers may have to act quickly to secure the product they have chosen,” adds she does.
It can be tempting to jump straight into investing the foreclosure money because you have a better chance of making a profit than letting it languish in a savings account.
However, if you’ve just started to nurture a nest egg, a savings account is usually the best home for that. That’s what Sarah Coles, personal finance analyst at Hargreaves Lansdown says.
“People need enough to cover three to six months of essential expenses,” she says. “They should also have cash for any one-off expenses planned over the next five years.”
THEN PUT MONEY IN SHARES AND ISA SHARES
Once you have a fund for rainy days you can consider investing, and Isa stocks and stocks are a good place to start.
It’s simply a tax envelope around your investments, allowing you to keep all of your growing wealth without handing over a dime in tax. Coles favors this approach. “A Stock and Isa Stock allows your money to grow tax-free and be withdrawn from tax as well,” she says.
“You can put up to £ 20,000 in your Isa this tax year. You should only invest money that you won’t need to spend for at least five or ten years.
… OR A LISA FOR YOUR FIRST HOME
Thousands of future homeowners have been able to take great strides in building a deposit on their first home thanks to foreclosure savings. For these, an Isa (Lisa) life can provide a very welcome cash boost.
Coles explains: “ If you are between the ages of 18-39 and planning to buy your first home, you can consider putting £ 4,000 into an Isa life as the government will exceed it up to £ 5,000. You can’t put up to £ 4,000 in a Lisa in a single tax year. So if someone who has saved £ 7,000 should put £ 4,000 now and the remaining £ 3,000 next April – or in shares and Isa shares.
INVEST – BUT BE CAREFUL WITH RISKS
There are thousands of different investments, from individual stocks to specialty funds. What is right for you will depend on how much risk you are willing to take and how much time you have to invest. However, certain precautions are universally recommended.
The principle of these is to buy a range of investments. This way your wealth will not be tied to the fate of a handful of businesses. To achieve a healthy mix, Scott Gallacher, director of financial planner Rowley Turton, favors a globally diversified portfolio with low-cost funds.
“A good option might be the L&G Multi-Index range, which covers a wide range of risk levels and has the advantage of very low costs,” he says.
Make sure your investment decisions aren’t swayed by the latest trends. The Financial Conduct Authority has warned that many new investors are investing their money in high risk investments.
It can be tempting to listen to the chatter in the pub or online forums about the latest cryptocurrency or business with a buzz around it.
However, be aware that you could lose your money and this is unlikely to be the path to long term wealth.
Independent financial advisor Adrian Lowcock warns: “ Cryptocurrencies generate a lot of interest and make people millionaires. When bubbles do form, a lot of people get rich, but it can often be temporary, so don’t risk the money you can’t afford to lose in such ventures.
KEEP IT SIMPLE – AND YOUR COSTS LOW
You don’t have to buy a lot of funds to build a well-diversified portfolio. Some funds offer a one-stop-shop, so just one gives you access to hundreds or even thousands of businesses.
Justin Modray, founder of Candid Financial Advice, discusses the Vanguard LifeStrategy range for investors looking for simplicity.
He believes an investor could put an entire £ 7,000 foreclosure savings fund into one of those funds to gain broad corporate exposure at a very low cost.
LOOK FOR EXCITING NEW OPPORTUNITIES
For many investors, a low cost global fund portfolio is sufficient. But if you’re confident, already have some investments, and can afford to take more risk with your foreclosure savings, you might consider more specific opportunities.
Gallacher says: “I could look at the potential in an area like renewable energy – and for that the Schroder Global Energy Transition Fund comes to mind.”
Darius McDermott, Managing Director of FundCalibre, suggests looking at funds that stand to benefit from some of the fruits of reopening global economies.
“The stock market might be volatile, but I would take the risk,” he says.
He suggests funds such as Schroder Global Recovery or Premier Miton Global Smaller Companies for those who want an international flavor – and Liontrust Special Situations for a UK focus.
FINALLY, DON’T FORGET YOUR PENSION
Another good tax-free option is to invest your locked-in savings in a pension.
Independent financial advisor Adrian Lowcock thinks pensions are especially good if you’ve already built up some savings. “Contributions to a pension are exempt from income tax, so a contribution of £ 7,000 would be raised to £ 8,750 for a base rate taxpayer,” he says.
“This is an attractive tax-free contribution and a very effective way to grow your savings.
Some links in this article may be affiliate links. If you click on it, we can earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.