Saving & Investing: My thoughts on the current state of saving in the UK

In short, saving sucks in the UK right now. I should be careful what I wish for though, low interest rates at the Bank of England also lead to lower repayments on debt such as mortgage repayments.

Saving is a constant challenge to try and maintain a half decent return in the current climate.

In light of this I have a somewhat varied approach. Let me share it with you.

Pay down any debt first (with some exceptions)

It makes absolutely no sense to save at say 0.5% if you have debt outstanding at a rate higher than this. Effectively the interest on the debt would wipe out your gains and you would be better off overall by paying the debt down.

There a couple of exceptions to this. They are, savings for a buffer or upcoming significant life event such as the imminent arrival of a baby or such (weddings don’t count), or debt on your mortgage (often overpaying this has little impact overall due to the large and long nature of the loan).

Save any way that makes it work for you

I have used all sorts of accounts, tools, apps, providers and platforms in my adult life, and the main reason for changing these is not chasing the best rate, but actually that my personal and financial situation continues to change, as does everyones. As such, the products and services that have made it work for me over that time have changed as my needs change.

There is no golden bullet when it comes to saving. There are some great services out there (moneybox, first direct, Marcus to name but a few) but ultimately as long as you are saving, you are doing well, so go with whatever makes sense for you.

A portion of your savings should remain “easy access”

Hopefully this is obvious, but especially when you manage to find a decent rate of return, it can be tempting to throw every last penny into it, but this can be problematic.

As I have previously mentioned, one of the functions of your savings should be to deal with the inherent variability in life’s costs. Lets say your boiler breaks down during winter, and all of your savings are tied up in an invest platform in the form of stocks and shares. It takes time to get that cash out, and so this could mean you freezing your butt off for days whilst you move money around so that you can pay for a repair or replacement.

As such, my advice would be to always keep a portion of your savings easy access. A months salary at least should be a good guide, but 3 months salary is optimum for this buffer.

The rest should be saved or invested for better returns

Once you are satisfied that you have enough easy access savings, its time to start thinking about how you can put some of your money to better work.

Returns on easy access savings are at an all time low. And at the moment there are tons of ways to get better returns that haven’t always been there. I will probably get into these products and services in more detail as time goes on, but some good things to check out include:

  • Regular savings accounts (these tend to lock in your savings for a period such as 1 year for a better return than easy access savings)
  • ISAs (These are tax free savings that offer a better return than easy access, however, these aren’t very competitive right now)
  • Investment
    • Dealing in Funds (these represent groups in investments and normally have lower fees than buying the investments individually)
      • On a do-it-yourself platform (you pick your investments)
      • OR On a robo-investment platform (an algorithm picks your investments for you)
  • Venture Capital or Peer 2 Peer Lending (much more risky, but lots of people have good experiences with these)

There are tons of products in all of these areas, so I wont get into them here, but I will in later posts.

You should avoid dealing in shares directly unless you absolutely know what you are doing. The high fees associated with share dealing usually make it kinda pointless unless you have thousands to invest, and have huge amounts of risk associated. Remember also to diversify to protect yourself from losses.

You should also remember that all investments carry elements of risk, and the value of these can go down as well as up (see section on risk below).

Be willing to move regularly for better returns

This should be fairly obvious. The performance of savings and investments change over time. If you have ever had a savings account for more than a couple of years you have likely had an email or letter explaining that the rate is being cut. No doubt the competitive introductory rate has gone somewhere else.

Financial institutions, like all businesses, are designed to get your business and are inherently less interested in keeping it. They assume you are too lazy to shop around. As such, when returns slow or rates drop, be prepared to move.

Your level of risk associated with investments should be tailored to you

As I mentioned above, investments carry risk. If you aren’t comfortable with the risk that your investments could lose value, you should probably be in a product more like a regular saver or ISA.

If you have the stomach for some risk in pursuit of a better return, then you tailor this risk to suit you. There is a huge range of choice out there with every level of risk imaginable.

I am of the school of thought that you should be willing to take more risk with your investments when you are younger for a couple of reasons. Your investments are usually smaller so you have less to lose, you have more time to recover from a loss, and a decent gain early on can potentially exponentially impact your returns later in life (Compound interest is the best).

However, this isn’t for everyone. And you should only go with what you are comfortable with. I for one have never been able to stomach VC funding.

It is OK to chase more speculative bigger returns with a portion of your savings

This is where the gambler in me shines.

In certain circumstances it is totally OK to chase bigger returns with some of your savings. There are various schools of thought on this. You might hear terms like satelliting or the 80/20 rule thrown around. Essentially they all boil down to the same thing, take a smaller portion of your savings or investments, seperate it from your main bucket, and chase more risky items with this.

I would only advise this if you have built up a decent bucket (in excess of 3 months salary) and are comfortable with the risk.

I also advise you do your research in this area, and bear in mind that information can get into the realms of bias when getting into these spaces.

My personal speculative interest right now is with the unknown quantity that is cryptocurrency. I can absolutely see the use case for the technology, but I’m not convinced if it’s the future or not. Either way, I have a little piece of the pie and will watch as it moons or dies.

My last bit of advise on this last point is to take out your initial stake at the earliest opportunity. If your investment gets to size where it is multiple sizes your original input, take your original stake out and enjoy the risk free ride!

This one turned out a little longer than my other posts to now, and is light on detail, but rest assured I will investigate all of these in more detail, and the products and such in each in the future.

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