Apathy is the enemy of building your wealth – but it is a scientific fact that with a nudge here and a nudge there, you can kickstart a savings programme that will reward you in the future for a minimum of effort now.
The idea behind it is called ‘nudge theory’, which was brought to prominence by Nobel prize winning American behavioural scientist Richard Thaler in a 2008 book Nudge: Improving Decisions About Health, Wealth And Happiness.
Co-authored with Cass Sunstein, it looks at what subtle actions (nudges) we can take ourselves – or encouraged by companies and the Government – to prompt better decisions. By making the choices easier to act upon, whether big or small, everyone will theoretically be better off.
Nudge theory: It looks at the subtle actions we can take ourselves to prompt better decisions
New technology in a proliferation of online services and money apps can help you start building a nest egg, spurred on by profitable – and easy – nudges. They can include reminders sent to you at key moments, or you can have money automatically swept into earmarked accounts.
Government legislation is also playing its part – applying the ultimate nudge for pension savers by enrolling millions of employees into workplace schemes and automatically deducting contributions via payroll into a retirement plan.
There are old-fashioned ‘nudge’ methods too that should not be overlooked. Simply setting up a direct debit from a bank account into a savings account or an investment plan such as an Isa can kindle a lifetime savings habit.
Here we outline easy steps to building wealth – one nudge at a time.
BUILD UP YOUR SAVINGS IN CASH… BIT BY BIT
Set up a regular payment – via a standing order from your bank account – that moves cash into a savings account as soon as you are paid. Anna Bowes, of account scrutineer Savings Champion, says: ‘Think of it as another household bill, but one you will benefit from in the future.’
Regular savings accounts often carry the best interest rates but, better still, they have strict terms and conditions that must be kept to earn the top interest rate. Bowes adds: ‘This discourages skipping deposits and making withdrawals.’
Among the best deals are from First Direct, M&S and HSBC – all paying 5 per cent. But you need to have a current account with them to benefit and there are also limits on how much you can salt away.
For example, First Direct limits savings to £300 a month. In some cases, interest will be chopped drastically if you miss a contribution. And deals often only last a year so savers need to make a note to switch.
An alternative is to save via one of the growing band of savings platforms which monitor and switch savings on your behalf. Bowes says: ‘These platforms are a way for cash-rich but time-poor savers, often with money sitting in measly high street bank accounts, to improve their returns. Although they do not cover the whole savings market, users should get a better deal.’
The main savings platforms are Hargreaves Lansdown, Flagstone, Octopus and Raisin. Savings Champion has a guide to platforms on its website at savingschampion.co.uk. If you want to be sure of earning the top interest rates, make a calendar reminder to yourself to monitor deals at least once a year.
But if you prefer hand-holding, Savings Champion offers a cash advice service. It alerts you to the best deals and helps with all the paperwork. Since the annual fee is 0.15 per cent (minimum £500) – it is best suited to those with savings of £100,000 or more.
For saving on the go, consider Chip. This app analyses spending habits and uses an algorithm to work out what you can afford to save. It then sweeps any spare money into a special account every few days.
It pays zero interest unless you sign up friends – for whom you get 1 per cent for each one you introduce (up to a maximum of 5 per cent).
App helped me to save £1,500
Goal: Natasha Burr uses the Moneybox app to save up for her dream of travelling the world
Natasha Burr, a public relations executive working in the health sector, uses an investment app to remind her to keep saving towards funding her dream of travelling in the not too distant future.
Wanting the potential to earn more than miserly interest on a savings account, she signed up for Moneybox which invests in index-tracking funds including Vanguard LifeStrategy, a global exchange-traded fund.
Natasha, 26, connects her bank card to Moneybox which rounds up her spending and sweeps the excess pennies and pounds into an investment account.
She also gets regular reminders suggesting she can top up if she wants – and she often acts upon these.
Natasha, who lives in London, says: ‘As only small amounts of my money are invested each week, I don’t notice it leaving my bank account but it adds up over time.’
In two years, she has saved £1,500 with barely a thought. She adds: ‘I also like the app’s “Journey into the future” feature that shows you how much you could increase your pot over time by topping up with an extra weekly contribution.’
STOCK MARKET SAVING MADE SIMPLE
Online firms are nudging people to invest by making the process simpler, and information easier to find.
Research by investment house Fidelity International indicates that women in particular are motivated to invest when it is made easy via a website or app. The firm’s own online offering, Investsense, uses nudge tactics to prompt customers to take action.
Prods include asking investors to consider whether they might want to open an Isa rather than invest outside a tax-efficient wrapper, reminding them they still have some Isa allowance to use up, or perhaps have too much money languishing in cash when it could be invested. There are also apps, such as Moneybox, that analyse spending habits and shift excess cash into a stock market investment to help spark an investment habit.
Online firms are nudging people to invest by making the process simpler
A more traditional route is to set up automatic contributions to an investment account with a broker or fund group from your bank account.
Laura Suter, from broker AJ Bell, says: ‘Regular investing is an ideal route for first-timers, because they can invest small amounts and get used to investing. Many investment platforms will allow you to start from as little as £25 or £50 a month, which you can then add to as you get more confident or have some spare cash.’
Someone salting away £50 a month over ten years could build a pot approaching £7,000 if investment returns average five per cent a year – more than £19,000 over 20 years.
Reinvesting dividends is also a pain-free way to help build wealth. Many companies pay shareholders a proportion of their profits in the form of income. Those who do not require this cash can use it to buy new shares.
Research by fund manager Schroders shows that this can make a big difference. Claire Walsh, personal finance director of Schroders, says: ‘Many people own shares in individual companies which they may have held for years. On many of these shares they will have been receiving dividend payments and seen this as a nice bonus to their income. But if they had instead reinvested that money, their investment would actually be worth much more today.’
Walsh has done the sums on £1,000 invested in the FTSE 100 Index of leading UK shares at the end of April 2009. Over the decade, £1,000 would have grown to £1,748 with dividends paid out of £569.
But had the dividends been re-invested, the pot would be worth £2,548 making you £231 better off overall. She says: ‘You often find people hold lots of money in cash savings and they don’t need to take the dividends as income. They could easily arrange to have them reinvested.’
For shares, you simply sign up to a dividend reinvestment plan – known as a Drip – either directly with the company via its registrar (such as Equiniti) or with your broker. There are costs involved.
If buying funds, which are purchased in units – look for the ones called ‘accumulation’ rather than ‘capital units’ as these automatically reinvest any dividends.
PROD YOURSELF NOW FOR A RICHER RETIREMENT
Putting aside money in a pension now that you cannot access for perhaps decades is one of the hardest actions for people to take with their money.
Many people prefer to have spending money today than worry about whether they will have enough to live on in 30 or 40 years.
This is why the ultimate nudge – auto-enrolment – was devised by the Government.
For the past seven years, millions of employees have been signed up to workplace pension schemes with contributions taken from their pre-tax pay. Although they can opt out of the arrangement, few bother (less than 10 per cent).
Saving for a pension: This is why the ultimate nudge – auto-enrolment – was devised by the Government
Last month, automatic contributions increased to 8 per cent (5 per cent paid by the employee) so the opt-out figure could rise. But even 8 per cent is considered too low a level for people to accumulate a decent pension.
Reminders that you have a personal pension perhaps taken out years ago can also act as a prod for boosting saving. For example, Scottish Widows pension customers who have a Halifax, Lloyds or Bank of Scotland bank account can see their pension via online banking – the only bank that offers this.
Robert Cochran, pensions expert at Scottish Widows, says: ‘About 165,000 customers actively look at their pension alongside their banking products every day.
‘We believe this has the potential to transform long-term savings and pension engagement.’
Another nudge includes increasing contributions on receiving a pay rise – above and beyond the automatic rises with auto-enrolment.
App Moneyhub nudges savers to top up pensions when it looks like you have had a pay rise.