Saving can often seem like a complex web of financial jargon, obscure-sounding product names, and unclear regulations. However, for all the technical talk and lack of clarity, saving money in the right way is crucial.
We’re always fighting a battle against inflation (a general rise in prices) although many of us don’t realise it. And over time it can eat away at the value of your savings. This is why it’s important to choose the right savings product.
Growing your savings doesn’t have to be scary
The good news is that saving doesn’t have to be scary or confusing. There are plenty of products out there and, more importantly, plenty of platforms that explain the basics of modern saving. If you keep cash at home, it doesn’t have the opportunity to grow. If you have money in a bank account, it can earn interest. However, given that interest rates have been close to zero for a number of years, your money isn’t really making much, it gradually loses value over time.
One way to grow your money over the long-term is to invest it in stocks and shares and there are a few products that can help you do this easily and tax-efficiently. An individual savings account (ISA) is one of the ways to do this.
The benefit of investing via an ISA is that you get a tax-free allowance of up to £20,000 (2021/2022). This means that any investments made via the ISA are exempt from capital gains tax. In contrast, investments made outside of an ISA are subject to capital gains charges of 10% or 20%, depending on your tax band. However, the charges are only applicable if you sell shares that result in a profit over the annual capital gains tax allowance (£12,300 for 2021/2022). The important point to note here is that there could be charges if you make investments outside of a stocks and shares ISA.
This has to be factored into your savings plan. Digital platforms make this possible but, importantly, they also explain how and why this type of savings product is valuable. Indeed, if we go back to our point about inflation, problems occur when you can’t beat the annual increases.
Growing your savings requires a long-term strategy
As cash and because of inflation, your £2,000 will likely lose value over a number of years. But by investing, you are putting this cash to work, but will likely stay the same. A savings product such as an ISA can help you stay ahead of the curve. Now, stocks and shares ISAs don’t offer guaranteed returns. The value of your investments can fall just as easily as they can rise.
But, when you invest in a broad index, like the S&P 500 index for the long term (think decades), data suggests that your savings will have grown over time. There will have been ups and downs along the way but generally, stock markets rise over time as economies grow and businesses become more valuable.
Of course, there are obvious questions here with regards to how much you should save and/or invest. The true answer is that it’s a matter of personal preference and circumstances. However, the general advice is that money saved and invested should be disposable income. Money that’s not required for your everyday living expenses.
Stocks and shares ISAs aren’t the only options. However, they’re becoming increasingly popular. Indeed, as of 2019, government data showed that 2.2 million Brits owned stocks and shares ISAs. This figure is likely to increase in the coming years as online innovations make the financial markets even more accessible. The ways we save are changing and that’s why you need to change as well. We’re in a digital area, so you need to start thinking about saving the digital way.