Introduction to Saving and Investing
Savings and Investments – An introduction
Very often, members of the public as well as people employed within the Financial Services industry, use the terms ‘savings’ and ‘investment’ almost interchangeably, but they are different, hence it is important to appreciate the distinction.
Saving – refers to the accumulation of a sum of money and is generally associated with a desire to reach a specific goal. For example, people save for a holiday, or a deposit for a house, or towards a Christmas gift fund.
Whatever the reason, saving generally takes place by utilising a ‘cash’ product such as a Bank or Building Society account, or perhaps a cash ISA (more on this later!). The idea is that access to the saved fund is easy, and without any / much penalty, and crucially that your money is safe, with low to no risk of losing out. An independent Financial Adviser can point you in the direction of the most suitable deals for you which carry the best interest rates and hence potential for growth.
Investment – refers to a desire to make an already existing pot of cash grow, and commonly used products for this are Stocks, Shares, Bonds, Funds and Property. Clearly these ‘products’ involve more risk – but at the same time, often offer a greater chance of significant and faster growth.
The risk involved means there is more need to seek the advice of an Independent Financial Adviser who can help to assess your attitude to risk, your ability to afford and take risk, and thus he/she can direct you towards suitable products and plans. Without financial advice, investing can be a minefield.
When investing, it is important to understand that there is no guarantee your money will grow. In fact, it is perfectly possible that some of even all, of your original fund can be wiped out if the product(s) selected do not perform in the way that was anticipated / hoped. Risk is a key characteristic of investment but taking the right advice can help to minimise this as well as maximize the potential for growth. An adviser will help you consider a range of factors including your specific circumstances, your goals, timeframes involved – and which products are available at the time. It is complex!
Assessing your financial ‘status’
Before proceeding with any investment, you need to fully understand your financial status. What assets / existing investments do you have? What is your income and how reliable is this? Are you clear about your goals? Do you have debts? How important is access to your money? How risk averse are you – or should you be? Do you have others who are dependent on you? Are there other things like the need to protect dependents which need to be set in place prior to considering investment? Also, your tax situation needs to be taken into consideration as this can be directive in the types of savings or investment choices appropriate to you.
To save or to invest?
There is no right or wrong option but here are just a few of the products which are potentially available to you
- Instant Access Saving Accounts – Give you safety and easy access to your money but generally interest rates are low
- Regular Savings Accounts – Generally, monthly deposits are made, so while still being ‘safe’, these accounts can offer a higher rate of interest than the above
- Fixed Term Deposits – Offer a fixed interest rate for an agreed period of time – typically 1 to 7 years – so it is important to take this option only if you can afford for your money to be tied up and hence unavailable to you (unless penalties are imposed)
- Cash ISAs / Stocks and Shares ISAs – Allow you to save money up to a specific annual limit (which is regularly updated) and have the benefit of being tax-free.
- Shares or Equities – When investing this way, you are effectively purchasing a ‘stake’ in a company, and that company is not ‘bound’ to succeed! Hence, this is certainly more risky territory than the savings options mentioned above. You may create your own portfolio of funds, or you may prefer to use a specialist investment company or scheme like an Investment Trust. Whatever you do, you must be aware that if the companies in which you have invested perform well, you stand to get income from dividends as well as potential capital gains when you choose to ‘sell up’. However, if the companies perform badly……it can be an entirely different story!
- Unit Trusts and Open-Ended Investment Companies (OEICs) – are investments which effectively mean that your money is ‘pooled’ with that of others. This allows the risk to be spread, even though your investments may be relatively small. The money pool is split and placed in a range of assets by experts known as Fund Managers. Of course, these people must be paid – hence fees and charges are involved. Some funds are ‘active’ meaning the managers selecting specific investments, whereas others are ‘passive’, like ‘trackers’ or ‘index’ funds which simply follow the market and hence have lower costs.
- Buy-to-Let property – can give you rental income as well as profit when the property is sold, but again, this is a complex area where property and rental prices as well as your tax situation must all be taken into account when assessing this as a possible route.
- Fixed Interest Securities – are effectively loans and are considered to be less risky than shares albeit that they are affected by inflation fluctuations
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