Setting aside a sum every month is the most painless way to save for the future. And when it comes to stock market investing, a regular savings plan can help smooth out the highs and lows – which is important during times of turbulence such as the last month or two, when the FTSE 100 index fell more than 10% in six weeks.
Once you have set up your direct debit or standing order, your money should quietly roll up over the years and provide a handy sum when you need it. Many people decide to save regularly to create a nest-egg for a child or grandchild.
As with a lump-sum investment, where you put your money should be influenced by your attitude to risk and how much time – and cash – you have.
With regular savings accounts offered by the high street players, you can sometimes put in as little as £10 a month, while many of the major names in the investment world offer schemes where you can pay in a minimum of £25 or £50 a month.
Here we look at options for people looking to set aside different amounts.
£10 a month
Before you start saving, pay down any unsecured debts such as credit cards or overdrafts. These can charge APRs of as much as 30% – far more than you will ever get on any investment. Then look to build a “rainy day” fund worth at least three months’ salary in an easy access account, to see you through financial emergencies.
A number of bank and building societies allow you to save small amounts in regular savings accounts, although others set the bar higher at £25, £50 or £100. You can compare rates at websites such as Moneyfacts.co.uk.
Saving £10 a month may barely seem worth the effort, but everybody has to start somewhere, says Andrew Hagger at personal finance site MoneyComms.co.uk. “The amount you set aside is less important than getting into the savings habit. You can always increase the sum when your finances permit it.”
If you don’t expect to need your money for a year or two, you might get a slightly better return from a fixed-rate regular savings account. Interest rates of up to 4% are available on accounts where you typically need to commit to paying in every month for a year. Saffronbuilding society has a one-year account paying 4%. Halifaxhas a Kids’ Regular Saver, paying 6%.
Today’s low interest rates may be dismal, but you are building a savings balance for when rates finally do pick up, Hagger says. “Set yourself a target, because seeing your savings grow will encourage you to keep going.” Hagger suggests setting up a direct debit into a savings account to leave your current account one day after payday. “If you wait until the end of the month, there may not be anything left.”
£50 a month
Once you can afford to start saving £50 a month, your options increase. If you still want to play safe with cash, you have more savings accounts to choose from.
Again, first pay down expensive debt and build an instant-access rainy day fund. Then shop around for the best savings account or look into a shares-based investment.
Over the long term, stocks and shares can really put your money to work. If you had invested £50 every month for the past 30 years in the average investment company it would now be worth £94,450, according to the Association of Investment Companies. Remember, that is no guarantee of future returns. You should invest in stock markets for a minimum period of at least five or 10 years, and preferably much longer, to overcome the inevitable short-term volatility.
You can invest £50 in stock market funds such as unit trusts and investment companies via a regular savings plan, says Justin Modray at Candid Money. “Look for a fund that spreads your money across a blend of shares, corporate bonds, commercial property and commodities to reduce risk.”
You can invest cheaply and easily through an online fund platform such as Alliance Trust, Cavendish Online, Chelsea Financial Services, Fidelity FundsNetwork, Hargreaves Lansdown and rplan. Hargreaves Lansdown allows a minimum Isa investment of £25 a month. Cavendish, Chelsea, Fidelity and rplan all allow Isa fund investments from £50 a month. Cavendish and Fidelity let you split your £50 between two funds, paying £25 into each.
Many brokers offer online tools to help you choose the right investments fund, or you could invest in a pre-selected investment portfolio based on different levels of risk. Rplan allows regular investments into its model portfolios from £50 a month.
Some stockbrokers also offer regular share saving plans allowing you to invest in individual company stocks from £50 a month, but that is too risky for most beginners, Modray says. Don’t forget to use your tax-free Isa allowance when investing. This allows you to save up to £15,000 each year without paying any income tax or capital gains tax on your returns.
£100 a month
Investing £100 a month can add up to serious money if you start early enough. If you put it in, say, a FTSE 100 tracker that returned 5% a year after inflation, you would have around £88,000 after 30 years, or £152,000 after 40 years.
To protect your gains, invest tax-efficiently either in an Isa or pension. While an Isa allows your money to grow free of tax, pension contributions attract tax relief at either 20%, 40% or 45%, depending on your tax bracket. So if you invest £100 a month and pay 20% tax, your pension company will claim a further £25 from the taxman, increasing the total to £125 a month. If you pay 40% tax, you need to claim relief for the additional 20% tax through your tax return. You can also take 25% of your pension pot as a tax-free lump sum at retirement, although you pay income tax on everything after that.
These are attractive tax benefits, especially now that the chancellor, George Osborne, is making pensions more flexible by freeing you to spend your money on whatever you like at retirement. You will also be free to pass any money remaining pension to your dependents free of tax when you die.
If you take out a self-invested personal pension (Sipp), or Isa, you can choose from thousands of funds and other investments, says Stuart Dyer, chief investment officer at investment portfolio service plan. “First work out your attitude to risk. The younger you are and the longer your investment timeframe, the more risks you can take, as you have time to recoup any short-term losses. As you near retirement, you should play it safer.”
You could split your £100 between two different investment funds, perhaps a UK fund and an overseas fund targeting, say, the US or emerging markets. Alternatively, you could even pay £25 into four different funds with Cavendish, Fidelity, or Hargreaves Lansdown.
£250 a month
If you want a comfortable retirement, this is the sort of money you need to set aside every month, according to many experts. If you invested £250 every month for 30 years and it grew by 5% after inflation, you would have nearly £210,000 at the end of that period. After 40 years, you would have more than £380,000.
Don’t put all your eggs in one basket, says Steve Rees, director of Manchester-based independent financial services firm Carpenter Rees. “With £250 a month, you are in a better position to build a balanced portfolio by splitting your money between a range of different funds.” You could even split your £250 across five different funds – for example, a low-cost FTSE 100 tracker, a fund investing in the US or Europe, an emerging markets fund, and even a corporate bond or commercial property fund. You can do fund research online through free websites such as Trustnet.com, or the online fund platforms listed above.
Regular monthly investments are actually safer than throwing in larger lump sums, because you avoid the danger that the market will plunge right after you part with your money. You also benefit from something known as pound-cost averaging. “When stock markets fall, your monthly payment buys more fund units at the lower price,” says Rees. “That can boost your returns, provided markets recover by the time you want your money back.”Whether you’re saving in a pension or Isa, check the charges carefully. If you invest £250 a month that grows at 5% a year, and your Isa or pension manager charges 1% a year, you will have almost £175,000 after 30 years. If it charges just 0.5%, you will have more than £191,000 – which is £16,000 more.
£500 a month
If you’re saving £500 a month, or £6,000 a year, you have a great opportunity to build real long-term wealth. You might want to take financial advice, as the fees may now be worth paying to help you build a balanced portfolio, especially if you have other investments. A site such as Unbiased.co.uk may be able to help you find an adviser.
At this level you really can’t afford to ignore stock markets, provided you are investing for more than five years, says David Smith, director of financial planning at wealth advisers Tilney Bestinvest. “Saving £500 a month in cash is a poor use of your money. Today’s low savings rates mean it is likely to fall in value in real terms after inflation.”
With relatively large sums at stake, you should spread your money around, and may even want to consider premium bonds. Smith adds: “You could even put some of it into premium bonds, which offer tax-free returns, plus the chance of winning one of two £1m prizes every month. The interest rate allocated to prizes is currently just 1.35%, however, so unless you get lucky, you won’t get a great return.”
As ever, it’s important to spread your risk, by investing in a blend of UK and global equities, corporate bonds and so on.
Even £500 a month really isn’t enough to invest in individual company shares, given the risks involved, so stick to collective investment funds, Smith says.
HeSmith says pensions are now “inarguably better” than Isas, provided you don’t need the money before age 55 at the earliest. “Alternatively, you could start by saving your money in an Isa, then take your tax-free returns and invest them in a pension at retirement to claim tax relief on your contributions as well.”