Saving money is usually a slog for many households, but the last year has been an exception.
Millions have managed to save more than ever before, simply because they could not spend on what they would have done in normal times.
All those forgone meals out, holidays and commuting costs add up. Savers put away £7,032 on average last year, according to comparison website MoneySupermarket. Of course, not everyone was so lucky.
For those who managed to save, naturally it is tempting to splash out. But what about setting some savings aside and using them to turbo boost your long-term wealth? We asked investing experts what they would do with a £7,000 windfall to help it grow.
Difficult times: All those forgone meals out, holidays and commuting costs add up
1. Top up your emergency fund
Many households have simply let their lockdown savings pile up in current accounts. With interest rates so low, at times it hardly feels worth shifting them over into a savings account.
However, rates on savings accounts and cash Isas may be pitiful, but many are still several times higher than those on current accounts. You will have to pick carefully though to get the best deals.
If you don’t need to access your savings any time soon, consider a fixed-term savings account, which will reward you with higher rates for keeping your money locked away.
Eleanor Williams, finance expert at savings scrutineer Moneyfacts, also suggests looking at less familiar brands, such as the challenger and Islamic banks, as they offer many of the best rates.
‘Keeping a close eye on the top rate tables would be wise, as some attractive rates do not have very long shelf lives, so savers may need to move swiftly to secure their chosen product,’ she adds.
It can be tempting to jump straight into investing lockdown cash, as you stand a better chance of making a profit than leaving it languishing in a savings account.
However, if you have just started to nurture a nest egg, a savings account is generally the best home for it. So says Sarah Coles, personal finance analyst at wealth platform Hargreaves Lansdown.
‘People need enough to cover three to six months of essential expenses,’ she says. ‘They should also have cash for any planned one-off expenses in the next five years.’
2. Then put cash into a stocks and shares Isa
Once you have a rainy day fund, you can consider investing, and a stocks and shares Isa is a good starting place.
It is simply a tax wrapper around your investments, allowing you to hold on to all of your growing wealth without handing over a penny in tax. Coles favours this approach. ‘A stocks and shares Isa enables your money to grow free of tax, and be withdrawn tax-free too,’ she says.
‘You can put up to £20,000 into your Isa this tax year.’ You should only invest money that you will not need to spend for at least five or ten years.
…Or a Lisa for your first home
Thousands of aspiring homeowners have been able to take great strides towards putting together a deposit on their first home thanks to lockdown savings. For these, a Lifetime Isa (Lisa) can provide a very welcome cash boost.
Coles explains: ‘If you’re aged 18- 39 and planning to buy your first home, you could consider putting £4,000 into a Lifetime Isa, because the Government will top it up to £5,000.’ You can only put up to £4,000 into a Lisa in any one tax year. So if anyone who’s saved £7,000 would have to put in £4,000 now and the remaining £3,000 in next April – or in a stocks and shares Isa.
3. Invest – but be careful with risk
There are thousands of different investments available, from individual shares to specialist funds. Which is right for you will depend on how much risk you are willing to take and how long you have to invest. However, some precautions are universally advised.
The principle of these is buying a range of investments. That way, your wealth won’t be tied to the fate of just a handful of companies. To achieve a healthy mix, Scott Gallacher, director of financial planner Rowley Turton, favours a globally diversified portfolio achieved through low-cost funds.
‘One good option could be the L&G Multi-Index range, which caters for a wide range of risk levels and has the advantage of very low costs,’ he says.
Make sure that your investing decisions are not swayed by the latest trends. The Financial Conduct Authority has warned that many new investors are putting their money into high-risk investments.
It can be tempting to listen to the chatter in the pub or online forums about the latest cryptocurrency or company with a buzz around it.
However, be aware that you could lose your money and it is unlikely to be the road to long-term wealth.
Independent financial adviser Adrian Lowcock warns: ‘Cryptocurrencies are attracting a lot of interest and making people millionaires. When bubbles form lots of people become wealthy, but it can often be temporary so don’t risk money you can’t afford to lose on such ventures.’
4. Keep it simple and your costs low
You don’t have to buy lots of funds to build a well-diversified portfolio. Some funds provide a one-stop shop so just one gives you access to hundreds or even thousands of firms.
Justin Modray, founder of Candid Financial Advice, mentions the Vanguard LifeStrategy range for investors looking for simplicity.
He believes that an investor could put an entire fund of £7,000 of lockdown savings into one of these funds to get a wide exposure to companies at very low cost.
5. Seek out new and exciting opportunities
For many investors, a portfolio of low-cost global funds is ample. But if you are confident, already have some investments and can afford to take greater risk with your lockdown savings, you could consider more specific opportunities.
Gallacher says: ‘I might look at the potential in an area like renewable energy – and for this, the Schroder Global Energy Transition Fund comes to mind.’
Darius McDermott, managing director at FundCalibre, suggests looking at funds that are set to enjoy some of the fruits of global economies reopening.
‘The stock market may be volatile but I’d take the risk,’ he says.
He suggests funds such as Schroder Global Recovery or Premier Miton Global Smaller Companies for those wanting an international flavour – and Liontrust Special Situations for a UK focus.
6. Finally, don’t forget your pension
Investing your lockdown savings in a pension is another good tax-free option.
Independent financial adviser Adrian Lowcock believes pensions are especially attractive if you already have some savings built up. ‘Contributions to a pension are free of income tax, so a contribution of £7,000 would be increased to £8,750 for a basic rate taxpayer,’ he says.
‘This is an attractive tax-free contribution and a very effective way to grow your savings.’
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