We asked financial expert Holly Mackay for her views. Holly is the founder and Chief Exec of Boring Money, an independent financial website which helps ‘normal people’ to make smart decisions about their savings and investments. Without boring them to tears on the way!
When anyone asks me this question, there's two things I immediately ask back. Have you got an emergency cash buffer? And what's your timeframe?
“I have one year to save”
Don't go near the stock market. Shares only really bite when we are forced sellers at a time when markets are having a shocker. The financial world went into meltdown in the banking crisis back in 2008 and if you had invested in 2007 with a short-term view you would have been burned.
If you're saving for the short-term then stick with cash. Sadly, rates are horribly low today. The best short-term options around currently pay about 1.3% for a one year fixed-term ISA or 1.2% for an easy access cash account.
Don’t necessarily be swayed by seductive rates on current accounts – these usually only apply to the first few thousand pounds so read the terms and conditions first.
“I have about a 5 year timeframe”
At this stage I think it makes sense to look to the stock market. Stocks and shares ISAs are simply savings accounts which quarantine your savings from tax and are usually a sensible way to save. You can get access to your money whenever you need it too. So what to put in your ISA?
If you're not confident then I'd pick a 'multi-asset' fund where you pay a boffin to prepare up a mixed bag of investments from around the world. This means you can buy a single fund (or pooled collection of shares and investments) and get diversification.
If you're saving for a house and a first-time buyer then think about the cash savings account called the Help to Buy ISA. If you're under 40, are dead set on buying a house and also like the idea of investing in shares, check out the Lifetime Isa. Both options give you free top-ups from the Government (up to certain caps).
“This is a longer-term plan”
Ok at this point we really need to re-assess our feelings about risk. Yes, the stock is a bumpy ride. But over any 10 year period since markets began, history tells is that shares have done better than cash 9 times out of 10. With these timeframes, I think sticking in cash is like spending every day in bed because we’re scared of getting run over if we go out. Recklessly cautious!?
If you put £65 into an ISA every month for 10 years and we assume reasonable annual returns of 4% after fees, that would build your £10,000 stash. If you have a lump sum now, as a guide, £6,700 today could turn into £10,000 in 10 years if we assume similar returns. No-one can guarantee these so this is just an illustration only.
If this is super long- term and ear-marked for retirement then do consider setting up a private pension. It's easy to do online and you get tax relief. In real English this means basic rate tax payers get a free £20 for every £80 they pay in. Higher rate taxpayers get a free £40 top-up. This ‘free money’ is the Government’s bribe to try and get us to be prudent and sensible! There are conditions attached and caps so do your reading first .
If you want to stick to cash then do shop around. The best rates today for decent chunks of short-term savings are about 1.2%
For amounts under £10,000 I don't think buying individual shares is sensible. Just because a mate down the pub recommended it. You put all your eggs into one basket and trading fees- usually about £10 a pop - eat into your savings
Look at ‘funds’ which are pooled baskets of investments managed for you by a numbers geek called a fund manager – it’s like an investment ready-meal
You can just buy a 'tracker' fund for the FTSE All Share which literally gives you access to all the biggest listed British companies. So you own loads of shares through one single purchase and one single decision.
Robo advisers are new online solutions which typically ask you a few questions and put you into a ready-made mix of investments – nice for digital savvy people on the go
ISAs are great for access and flexibility. Pensions give you free top-ups from the Government but do lock your money away. You can save into a combo of both through the same online provider . These services are called investment platforms
You can see Holly’s ISA Best Buy picks at boringmoney.co.uk/best-buys or read up more on Help to Buy ISAs versus Lifetime ISAs in the Rebellious Renters section of the site.
Article published in Metro Newspapers on Wednesday, 20th September 2017.