1. Get your savings sorted. The first priority in saving has to be the building of a safety net. You should aim to build up 3 months’ worth of normal outgoings in a cash deposit account. These easy access savings will give you the security of knowing that should you be unable to work due to illness, accident or redundancy, or just choose a career break to retrain, you will have funds to pay your bills. It also gives you the freedom to invest without needing short-term access. Here are a few options. You can do this with a savings account from any high street bank.
2. Get the most from your employer. If you’re employed, the next port of call should be understanding the benefits your employer offers and taking advantage. All employers now have to offer a pension scheme to those over age 22 who earn £10,000 a year or more. The employer has to pay in 1% of salary for every 1% paid in by the employer (rising to 2% in April), and tax relief is given on employer savings. Every £8 paid in automatically increases to £10. Paying into pensions early will enable earlier retirement than the State Pension age of 68, and private pensions can be accessed 10 years before state retirement age.
You may be surprised by other benefits offered by your employer. Many firms provide life cover, paid for by the employer. This is essential to cover debts or if there are dependants to provide for. This is usually a tax free benefit. Similarly, check what your company’s sick pay policy is. The law only requires £100 per week to be paid for 28 weeks. Many companies provide more at the employer’s expense but if you don’t have this, it’s well worth buying a private sick pay continuation policy to take up the slack when payments from the employer cease. There’s a helpful article here.
3. Invest for the long term. There’s no way around it. To inflation-proof your money, it needs to be invested longer term, which means taking some risk. Investing in the shares of companies which can charge customers more when inflation starts to bite is a good way of getting returns that keep pace with inflation. Utility and rail companies are good examples.
Buying individual shares can be very risky, so investing in a fund which includes lots of shares like this is a good way to reduce the risk of losing out if one stock runs into trouble. Retail investment funds typically hold 50 to 200 companies at a time. Wrapping your fund in an ISA will mean that income and gains are tax free. Up to £20,000 per year can be invested in ISAs by over 18s.
4. Look at buying alternatives. If buying a property is out of reach where you live (which is the case for many of us!) property ownership could be achieved in other ways. You could consider:
To see our top picks for stocks and shares ISAs, visit our Best Buys table here.