It has become increasingly evident over recent years that difficult situations in life can crop up at any time. Whether it is redundancy, sickness or the need for a new household appliance, having some money saved up can help tackle these situations head-on and thus avoid the pain of debt and financial difficulties.
Moneymanual
As a result, it is crucially important that you start saving to avoid financial worries now and in the future. Savings and Investments is a practical and easy-to-follow manual that offers clear advice and guidance on a range of issues to do with saving and investments, including:
• • • • •
How do I start saving? When should I save? What saving options are there? What is the difference between investments and savings? How do pensions work?
If you find yourself dependent on expensive credit to fund your lifestyle then this booklet can help you. Included is a pull-out budget sheet that you can use and re-use to help you get your finances back on track and start saving. So, start saving now and you can say goodbye to money stress, and say hello to a brighter financial future! “With savings behind them, people can cope far better with the events that life throws at them. This welcome guide does a great job of encouraging people to start saving and guiding them through the maze of different savings and investment options.” Mark Lyonette Chief Executive, Association of British Credit Unions Ltd (ABCUL)
Production of this booklet sponsored by
Lynton House, 7-12 Tavistock Square, London WC1H 9LT Tel: 0207 380 3390 office@creditaction.org.uk www.creditaction.org.uk www.moneybasics.co.uk Registered Charity No.1106941
Includes pull-out budget sheet
for savings & investments
PARADIGM NORTON are delighted to be partnering with Credit Action in order to raise the awareness of wise money management. The 2010 Savings and Investments Moneymanual is a wonderful tool for those seeking to make good financial decisions. Having worked for over 20 years with the challenges that individuals face when thinking through their finances, we have realised that there are a
Savings and Investments
small number of basic financial principles which, if followed, help avoid the growing debt problems which many people find themselves in. The Credit Action Savings and Investments Moneymanual very clearly sets out these timeless principles. PARADIGM NORTON are delighted to play our part in the creation of this helpful guide.
Eoin Hamill
PARADIGM NORTON are delighted to be partnering with Credit Action in order to raise the awareness of wise money management. The 2010 Savings and Investments Moneymanual is a wonderful tool for those seeking to make good financial decisions. Having worked for over 20 years with the challenges that individuals face when thinking through their finances, we have realised that there are a
Savings and Investments
small number of basic financial principles which, if followed, help avoid the growing debt problems which many people find themselves in. The Credit Action Savings and Investments Moneymanual very clearly sets out these timeless principles. PARADIGM NORTON are delighted to play our part in the creation of this helpful guide.
Eoin Hamill
Contents Š 2010 Credit Action Published by
Introduction
2
Why should I save?
4
Credit Action Lynton House 7-12 Tavistock Square London
It pays to save
6
How do I start saving?
8
WC1H 9LT Tel 0207 380 3390 office@creditaction.org.uk www.creditaction.org.uk
When should I save?
13
www.moneybasics.co.uk
Exploring savings options
14
and Wales no. 5244075
Investment
19
Helpline 0800 138 1111 (operated by the Consumer Credit Counselling Service)
Tax on savings and investments
25
First Published 2010
Pensions
26
Written by Eoin Hamill, Research and Policy Officer, Credit Action
Wills
29
Conclusion
30
Jargon buster
31
Useful organisations
35
Notes
37
Credit Action is a registered charity no. 1106941 and a company limited by guarantee, registered in England
Edited by Keith Tondeur, President, Credit Action We are also very grateful to Chris Sheldon, Director and Deputy Chief Executive, Kingdom Bank Ltd. for his many constructive comments and helpful input. Design and production by stephen lown graphic designer Credit Action is a national money education charity dedicated to helping educate individuals and families in all aspects of money management. Credit Action works in partnership with another charity, Consumer Credit Counselling Service (CCCS), who answer all our helpline calls. CCCS is a charity dedicated to providing confidential, free counselling and money management assistance to financially distressed families and individuals. This book is only a guide to managing money and we have had to simplify some issues and make general comments. Dealing with personal finance is often extremely complicated and so you cannot hold us responsible for any action you take, or do not take, based only on what is written in this book. If you have serious problems with your personal finances, you should get expert advice immediately.
Contents Š 2010 Credit Action Published by
Introduction
2
Why should I save?
4
Credit Action Lynton House 7-12 Tavistock Square London
It pays to save
6
How do I start saving?
8
WC1H 9LT Tel 0207 380 3390 office@creditaction.org.uk www.creditaction.org.uk
When should I save?
13
www.moneybasics.co.uk
Exploring savings options
14
and Wales no. 5244075
Investment
19
Helpline 0800 138 1111 (operated by the Consumer Credit Counselling Service)
Tax on savings and investments
25
First Published 2010
Pensions
26
Written by Eoin Hamill, Research and Policy Officer, Credit Action
Wills
29
Conclusion
30
Jargon buster
31
Useful organisations
35
Notes
37
Credit Action is a registered charity no. 1106941 and a company limited by guarantee, registered in England
Edited by Keith Tondeur, President, Credit Action We are also very grateful to Chris Sheldon, Director and Deputy Chief Executive, Kingdom Bank Ltd. for his many constructive comments and helpful input. Design and production by stephen lown graphic designer Credit Action is a national money education charity dedicated to helping educate individuals and families in all aspects of money management. Credit Action works in partnership with another charity, Consumer Credit Counselling Service (CCCS), who answer all our helpline calls. CCCS is a charity dedicated to providing confidential, free counselling and money management assistance to financially distressed families and individuals. This book is only a guide to managing money and we have had to simplify some issues and make general comments. Dealing with personal finance is often extremely complicated and so you cannot hold us responsible for any action you take, or do not take, based only on what is written in this book. If you have serious problems with your personal finances, you should get expert advice immediately.
Introduction
Until very recently, saving money had become increasingly unfashionable for
Below are some common questions people ask.
• Why is it a good idea to save?
individuals and households due to the ease of accessing credit from banks and other lenders. Instead of saving to buy that new car or to help oneself cope with unexpected redundancy or sickness, many of us were content to borrow and pay back later.
• How do I start saving? • Where should I put my savings? • Why don’t I just use a credit card or other instant credit? • If I have some spare money, how do I go about investing some money in
However, as the repercussions of the global financial crisis have unfolded, and it remains difficult to access credit, it is painfully obvious that many individuals who have been made redundant will simply not have enough money to prevent them slipping into considerable financial difficulties.
the stock market? This guide aims to give clear information on how to take control of your finances and start saving for the future.
Indeed, a survey from TNS Omnibus found that 32% of people made redundant would fail to meet their current living expenses in the first month, with one in six defaulting immediately. Just under half (43%) of working adults questioned had sufficient funds in place to survive more than three months. This is why we are beginning to see people increasingly thinking about savings so that they have some cushion to protect themselves if the worst happens. If you have not done so already, now is the time to take control of your finances and start planning for the future by beginning to save. This Moneymanual will endeavour to answer your questions about savings and investments.
2
3
Introduction
Until very recently, saving money had become increasingly unfashionable for
Below are some common questions people ask.
• Why is it a good idea to save?
individuals and households due to the ease of accessing credit from banks and other lenders. Instead of saving to buy that new car or to help oneself cope with unexpected redundancy or sickness, many of us were content to borrow and pay back later.
• How do I start saving? • Where should I put my savings? • Why don’t I just use a credit card or other instant credit? • If I have some spare money, how do I go about investing some money in
However, as the repercussions of the global financial crisis have unfolded, and it remains difficult to access credit, it is painfully obvious that many individuals who have been made redundant will simply not have enough money to prevent them slipping into considerable financial difficulties.
the stock market? This guide aims to give clear information on how to take control of your finances and start saving for the future.
Indeed, a survey from TNS Omnibus found that 32% of people made redundant would fail to meet their current living expenses in the first month, with one in six defaulting immediately. Just under half (43%) of working adults questioned had sufficient funds in place to survive more than three months. This is why we are beginning to see people increasingly thinking about savings so that they have some cushion to protect themselves if the worst happens. If you have not done so already, now is the time to take control of your finances and start planning for the future by beginning to save. This Moneymanual will endeavour to answer your questions about savings and investments.
2
3
Why should I save?
It has become increasingly evident over the last few years that there is a tendency for certain situations in life to crop up when you
Short term goals (0-2 yrs)
•
Have enough money coming in to pay for my basic needs and some left over for leisure
least expect them. As a result, it is crucially important that you start saving now to avoid financial difficulties in the
•
Holiday
future. Furthermore, by saving now you are giving yourself options in the future.
•
Pay off all of my credit cards and loans (including student loans)
A good starting point is to have between 3 and 6 months’ worth of expenses (rent, bills,
•
Get married
the current economic environment, these savings should help you keep your head
•
Enjoy a new hobby or get more qualifications
above water until you manage to regain employment.
•
Buy things for myself or my family (such as a new appliance, furniture, TV, clothing)
Once you have managed to generate a fund to cover yourself for emergencies, it would
•
Give some money to charity
•
Help out my family members
food etc) saved up. If you are made redundant, which is sadly increasingly common in
be a good idea to start thinking about your short, medium and long term goals. Many of these goals will only be achieved through saving, so it is a good idea to set out which goals you want to achieve and start saving towards them now.
Medium term goals (2-5 yrs)
Opposite are some examples of
•
Save for a new car
goals you may want to achieve.
•
Buy a home
•
Start a family
•
Decorate your house
•
Change jobs
Long term goals (5 yrs+)
•
Start my own business
•
Pay off my mortgage
•
Build my retirement savings
•
Leave some money or property to family members
4
5
Why should I save?
It has become increasingly evident over the last few years that there is a tendency for certain situations in life to crop up when you
Short term goals (0-2 yrs)
•
Have enough money coming in to pay for my basic needs and some left over for leisure
least expect them. As a result, it is crucially important that you start saving now to avoid financial difficulties in the
•
Holiday
future. Furthermore, by saving now you are giving yourself options in the future.
•
Pay off all of my credit cards and loans (including student loans)
A good starting point is to have between 3 and 6 months’ worth of expenses (rent, bills,
•
Get married
the current economic environment, these savings should help you keep your head
•
Enjoy a new hobby or get more qualifications
above water until you manage to regain employment.
•
Buy things for myself or my family (such as a new appliance, furniture, TV, clothing)
Once you have managed to generate a fund to cover yourself for emergencies, it would
•
Give some money to charity
•
Help out my family members
food etc) saved up. If you are made redundant, which is sadly increasingly common in
be a good idea to start thinking about your short, medium and long term goals. Many of these goals will only be achieved through saving, so it is a good idea to set out which goals you want to achieve and start saving towards them now.
Medium term goals (2-5 yrs)
Opposite are some examples of
•
Save for a new car
goals you may want to achieve.
•
Buy a home
•
Start a family
•
Decorate your house
•
Change jobs
Long term goals (5 yrs+)
•
Start my own business
•
Pay off my mortgage
•
Build my retirement savings
•
Leave some money or property to family members
4
5
Have a look through the goals on the previous page and write down which of these, if any, you wish to achieve in the future. It is natural to have your sights set on several
Supertele 32” LCD TV Let’s say you wanted to purchase a ‘Supertele’ 32” LCD TV; you have the following options:
goals, so if you have some spare money, assign a proportion of this money to each goal every month. The proportion you put away for each goal will depend on your individual
High Street / online best price
£593.98
priorities. It may be worth separating your savings for each goal into different types of
Bought using credit card (17.9%)
£653.16 (£54.43 a month for 12 months)
Payday loan (173.7%)
£750.00 (payable in 1 month)
Doorstep credit (189.2%)
£1015.75 (£17.83 per week)
Hire purchase (29.9% without cover)
£1104.48 (£7.08 per week for 156 weeks)
Hire purchase (29.9% with cover)
£1698.84 (£13.29 per week for 156 weeks)
savings accounts to reflect the different time horizons of each goal (i.e. long term goal could go into a fixed term bond). Another important thing to remember is that every bit of money you put into a savings account will generate you more income in the form of savings interest. In the current economic climate the Bank of England
As is clear from the figures above, buying the TV outright is by far the cheapest option.
base rate is at a record low, and savings
It is so much cheaper to save first than to buy on credit. In order to take advantage of
rates are not as high as in the past, yet
this saving, you need to start saving now! Even if you cannot save the full amount,
there are still accounts out there which will
saving a proportion of the cost will greatly decrease the amount you have to
make your money grow. Visit the Consumer
borrow and pay back with interest.
Financial Education Body (CFEB) website
How much would I save if…?
www.moneymadeclear.org.uk and use the comparative tables to help you select
Have a look at this table to see how much savings you could generate by saving as little
a savings account that offers you the
as £10 per month.
best returns.
Monthly Contribution £
Year 1
Year 5
Year 10
Year 20
£
£
£
£
10
123
683
1,559
4,127
20
247
1,366
3,119
8,255
30
370
2,049
4,678
12,382
Over the last few years, we consumers have become increasingly reliant on credit to
40
493
2,732
6,237
16,510
fund our lifestyles. This dependence on credit (overdrafts, credit cards, personal loans)
50
617
3,414
7,796
20,637
has contributed significantly to the financial crisis that we have seen unfold over the past
60
740
4,097
9,356
24,765
two years. Not only this, it has also led to many of us paying far more for our products
70
863
4,780
10,915
28,892
than we would have done if we had saved up the money in the first place.
80
986
5,463
12,474
33,020
90
1,110
6,146
14,034
37,147
100
1,233
6,829
15,593
41,275
It pays to save What happens if you save each month?
To see how you can benefit by saving up for products have a look at the following example.
This table assumes the money is placed in a savings account that pays 5% AER interest. Figures have been rounded to the nearest pound. 6
7
Have a look through the goals on the previous page and write down which of these, if any, you wish to achieve in the future. It is natural to have your sights set on several
Supertele 32” LCD TV Let’s say you wanted to purchase a ‘Supertele’ 32” LCD TV; you have the following options:
goals, so if you have some spare money, assign a proportion of this money to each goal every month. The proportion you put away for each goal will depend on your individual
High Street / online best price
£593.98
priorities. It may be worth separating your savings for each goal into different types of
Bought using credit card (17.9%)
£653.16 (£54.43 a month for 12 months)
Payday loan (173.7%)
£750.00 (payable in 1 month)
Doorstep credit (189.2%)
£1015.75 (£17.83 per week)
Hire purchase (29.9% without cover)
£1104.48 (£7.08 per week for 156 weeks)
Hire purchase (29.9% with cover)
£1698.84 (£13.29 per week for 156 weeks)
savings accounts to reflect the different time horizons of each goal (i.e. long term goal could go into a fixed term bond). Another important thing to remember is that every bit of money you put into a savings account will generate you more income in the form of savings interest. In the current economic climate the Bank of England
As is clear from the figures above, buying the TV outright is by far the cheapest option.
base rate is at a record low, and savings
It is so much cheaper to save first than to buy on credit. In order to take advantage of
rates are not as high as in the past, yet
this saving, you need to start saving now! Even if you cannot save the full amount,
there are still accounts out there which will
saving a proportion of the cost will greatly decrease the amount you have to
make your money grow. Visit the Consumer
borrow and pay back with interest.
Financial Education Body (CFEB) website
How much would I save if…?
www.moneymadeclear.org.uk and use the comparative tables to help you select
Have a look at this table to see how much savings you could generate by saving as little
a savings account that offers you the
as £10 per month.
best returns.
Monthly Contribution £
Year 1
Year 5
Year 10
Year 20
£
£
£
£
10
123
683
1,559
4,127
20
247
1,366
3,119
8,255
30
370
2,049
4,678
12,382
Over the last few years, we consumers have become increasingly reliant on credit to
40
493
2,732
6,237
16,510
fund our lifestyles. This dependence on credit (overdrafts, credit cards, personal loans)
50
617
3,414
7,796
20,637
has contributed significantly to the financial crisis that we have seen unfold over the past
60
740
4,097
9,356
24,765
two years. Not only this, it has also led to many of us paying far more for our products
70
863
4,780
10,915
28,892
than we would have done if we had saved up the money in the first place.
80
986
5,463
12,474
33,020
90
1,110
6,146
14,034
37,147
100
1,233
6,829
15,593
41,275
It pays to save What happens if you save each month?
To see how you can benefit by saving up for products have a look at the following example.
This table assumes the money is placed in a savings account that pays 5% AER interest. Figures have been rounded to the nearest pound. 6
7
How do I start saving?
Creating a budget
In order to start saving you first have to take control of your finances. A good way of
Use the sample budget form and follow the steps below to create your budget. Also
doing this is to create a budget. A budget is a plan that helps you to identify your regular
included in this manual is a pull-out budget sheet for you to photocopy and use, and re-
income, expenses and savings. It can also help you identify the level and importance of
use every month!
your expenses and help you to see exactly where your money goes.
1. Work out your income (including any benefits you may receive). Make sure you are
Why budget?
taking your net income; that is, your income after tax and National Insurance have
Making a budget helps you to:
could come from.
•
been taken off. The example on the form shows you the type of areas your income
Get rid of stress by planning and monitoring your spending habits
•
heating, insurance and so on.
Know whether or not you are in control of your finances
•
2. List your regular commitments. This includes things like Council Tax, mortgage, rent,
3. Add up what you are spending on normal day-to-day living expenses – this includes things like shopping for food, clothes, transport, entertainment and so on.
Know how much money you have coming in
4. Record what you spend on occasional items – such as birthday and Christmas
each week or month, and how much to spend
presents, repairs or decorations to your house or flat, holidays and so on. You don’t
•
Cut back any unnecessary spending
buy these items regularly but it is helpful to put an amount to one side for them every
•
SAVE MONEY!
month. 5. Make sure that you work out your income and spending for the same period. For
How to create a budget
example, if the income is a monthly figure, the spending should be a monthly figure
Budgeting is not difficult, although it may take some
as well.
concentration and a bit of work. You do not need to be a
6. Add up your income and then add up your spending. If the spending is more than the
financial wizard or a maths genius to do it!
income, it may mean that you need help with your finances. It is important to review
The following tips will help create an accurate budget that you can really use to gain
your budget every month and adjust it as your income and expenses change.
control of your finances.
Once you have created a budget,
•
Be honest. Don’t try to skip certain items or underestimate your spending.
have a look to see in which areas
•
Be consistent and accurate. Making a budget involves keeping regular records of what you are spending. The little things that you buy can soon add up – you probably are spending more than you think. A sure-fire way to comprehensively keep track of your spending is to use the new Moneybasics Spendometer.
you can reduce your spending, or, additionally, how you can identify ways of boosting your income.
You can download the Moneybasics Spendometer for free from the Credit Action website at www.creditaction.org.uk By doing so you can immediately start to budget and easily keep track of your finances on your mobile phone, wherever you are.
8
9
How do I start saving?
Creating a budget
In order to start saving you first have to take control of your finances. A good way of
Use the sample budget form and follow the steps below to create your budget. Also
doing this is to create a budget. A budget is a plan that helps you to identify your regular
included in this manual is a pull-out budget sheet for you to photocopy and use, and re-
income, expenses and savings. It can also help you identify the level and importance of
use every month!
your expenses and help you to see exactly where your money goes.
1. Work out your income (including any benefits you may receive). Make sure you are
Why budget?
taking your net income; that is, your income after tax and National Insurance have
Making a budget helps you to:
could come from.
•
been taken off. The example on the form shows you the type of areas your income
Get rid of stress by planning and monitoring your spending habits
•
heating, insurance and so on.
Know whether or not you are in control of your finances
•
2. List your regular commitments. This includes things like Council Tax, mortgage, rent,
3. Add up what you are spending on normal day-to-day living expenses – this includes things like shopping for food, clothes, transport, entertainment and so on.
Know how much money you have coming in
4. Record what you spend on occasional items – such as birthday and Christmas
each week or month, and how much to spend
presents, repairs or decorations to your house or flat, holidays and so on. You don’t
•
Cut back any unnecessary spending
buy these items regularly but it is helpful to put an amount to one side for them every
•
SAVE MONEY!
month. 5. Make sure that you work out your income and spending for the same period. For
How to create a budget
example, if the income is a monthly figure, the spending should be a monthly figure
Budgeting is not difficult, although it may take some
as well.
concentration and a bit of work. You do not need to be a
6. Add up your income and then add up your spending. If the spending is more than the
financial wizard or a maths genius to do it!
income, it may mean that you need help with your finances. It is important to review
The following tips will help create an accurate budget that you can really use to gain
your budget every month and adjust it as your income and expenses change.
control of your finances.
Once you have created a budget,
•
Be honest. Don’t try to skip certain items or underestimate your spending.
have a look to see in which areas
•
Be consistent and accurate. Making a budget involves keeping regular records of what you are spending. The little things that you buy can soon add up – you probably are spending more than you think. A sure-fire way to comprehensively keep track of your spending is to use the new Moneybasics Spendometer.
you can reduce your spending, or, additionally, how you can identify ways of boosting your income.
You can download the Moneybasics Spendometer for free from the Credit Action website at www.creditaction.org.uk By doing so you can immediately start to budget and easily keep track of your finances on your mobile phone, wherever you are.
8
9
BUDGET SHEET
LIVING COSTS
Date prepared
Food and Housekeeping
Name
School Meals/Meals at Work
Address
Clothing/Footwear
Amount spent
Vehicle Running Costs (Tax, MOT, Insurance, etc.) Number of adults in household
Number of children in household INCOME weekly/monthly You
Partner
Total
Wages (take-home pay)
Petrol/Diesel Fares (Bus, Train, etc.) Telephone and Mobile Rentals (TV, Video, etc.)
Partner’s wages Working Tax Credit/Child Tax Credit
Prescriptions/Dentist/Optician
Part-time job
Childminder/Nursery
Child Benefit
School Costs
Job Seeker’s Allowance
Cigarettes/Alcohol
Disability and Sickness Benefit
Life Insurance/Pension/Investments
Pension
Building/Contents Insurance
Child Maintenance paid to you
Other
Rent or money from lodgers Other benefits
TOTAL HOUSEHOLD COSTS (1)
Other
TOTAL HOUSEHOLD INCOME (2)
Total Household Income
TOTAL LEFT AFTER TAKING (1) FROM (2)
EXPENDITURE weekly/monthly Priorities
Amount spent
Make budgeting part of your lifestyle
Mortgage/Rent/Board 2nd Mortgage/Secured Loan Endowment Policy
“Having been assisted by Credit Action in the past I now regularly use their resources
Child Maintenance paid by you
and moneymanuals. The importance and value of budgeting cannot be stressed enough
Council Tax
and itʼs vital to make it a regular part of your lifestyle. I also explain to my students why
Water Charges
savings, no matter how small, can be built into budgeting. Wise financial management
Electricity
now can save so much unnecessary heartache in the future.”
Gas Service Charges/Ground Rent
Tope Teniola
Court Fines/County Court Judgments
Financial Capability Trainer
Vehicle Finance/Hire Purchase Television Licence Self Employed
Remember there is a pull-out budget
Income Tax
sheet that you can use and re-use in the
National Insurance
centre of this booklet!
VAT
10
11
BUDGET SHEET
LIVING COSTS
Date prepared
Food and Housekeeping
Name
School Meals/Meals at Work
Address
Clothing/Footwear
Amount spent
Vehicle Running Costs (Tax, MOT, Insurance, etc.) Number of adults in household
Number of children in household INCOME weekly/monthly You
Partner
Total
Wages (take-home pay)
Petrol/Diesel Fares (Bus, Train, etc.) Telephone and Mobile Rentals (TV, Video, etc.)
Partner’s wages Working Tax Credit/Child Tax Credit
Prescriptions/Dentist/Optician
Part-time job
Childminder/Nursery
Child Benefit
School Costs
Job Seeker’s Allowance
Cigarettes/Alcohol
Disability and Sickness Benefit
Life Insurance/Pension/Investments
Pension
Building/Contents Insurance
Child Maintenance paid to you
Other
Rent or money from lodgers Other benefits
TOTAL HOUSEHOLD COSTS (1)
Other
TOTAL HOUSEHOLD INCOME (2)
Total Household Income
TOTAL LEFT AFTER TAKING (1) FROM (2)
EXPENDITURE weekly/monthly Priorities
Amount spent
Make budgeting part of your lifestyle
Mortgage/Rent/Board 2nd Mortgage/Secured Loan Endowment Policy
“Having been assisted by Credit Action in the past I now regularly use their resources
Child Maintenance paid by you
and moneymanuals. The importance and value of budgeting cannot be stressed enough
Council Tax
and itʼs vital to make it a regular part of your lifestyle. I also explain to my students why
Water Charges
savings, no matter how small, can be built into budgeting. Wise financial management
Electricity
now can save so much unnecessary heartache in the future.”
Gas Service Charges/Ground Rent
Tope Teniola
Court Fines/County Court Judgments
Financial Capability Trainer
Vehicle Finance/Hire Purchase Television Licence Self Employed
Remember there is a pull-out budget
Income Tax
sheet that you can use and re-use in the
National Insurance
centre of this booklet!
VAT
10
11
Money-saving ideas
When should I save?
1. Grocery shopping
Once you have assessed your financial situation by creating a budget, it is a good idea
a. Before going grocery shopping make a shopping list to resist the temptation to pick up stuff you don’t actually need. b. Always look out for special offers and, where possible, buy in bulk items that will
to look at the following general rules about saving. 1. Do you have any debts? If you have debts, especially expensive debts such as credit cards, it is usually better to pay off these first before saving, because the interest you pay on borrowed money is typically much higher than the interest rates you get on a
not go off. c. Buying ‘own brand’ products is normally cheaper. d. Try to avoid convenience food (such as prepared meals) as it usually costs much more than the cost of you making it.
savings account. This is especially true at the moment with savings rates at a record low and interest rates on credit card balances and overdrafts on the up. 2. Do you have any insurance? If you do not have any insurance to cover things like redundancy, illness or even death it is worth doing so to protect yourself and your
2. Often switching energy supplier will help save you money. It is also worth checking your energy bills when they come through, as many energy firms estimate your usage, so it is worth checking whether this is correct or not.
family. 3. Do you have any emergency funds? As life has the tendency to throw surprises at us, it is a good idea to have a certain amount of money stored away for any
3. Do you pay your bills with cash? If you do, set up your bills on Direct Debit or
unforeseen expenses that you have not planned for. A guideline amount would be to
Standing Order as you are often charged when you pay bills with cash or in store to
have between 3 and 6 months’ worth of expenses (rent, bills, food etc) saved up. It
cover the processing costs.
would be a good idea to keep this money in an easy access account in order to
4. Change your phone, TV and internet provider. It is always worth keeping an eye on
ensure that this can be dipped into in an emergency.
the latest telecommunications deals out there, as you may find there are some great deals to be had. If you have packages with Sky or Virgin Media you may want to think about downgrading the package you’re on in order to save some money. 5. See whether you can cut your insurance costs by visiting www.moneymadeclear. org.uk to compare the cost from different insurance providers. 6. See if your local area has a freecycle group – www.uk.freecycle.org
Money-making ideas 1. Do you have a spare room? If so, why not rent it out to generate some extra income? 2. Do you have any old mobiles around your house? If so, why not try and recycle them for cash? 3. Sell off any junk, old CDs/ DVDs or furniture you have just sitting around your house. 4. Do you have a parking space that you don’t use? Why not see whether anyone wants to buy it off you?
12
13
Money-saving ideas
When should I save?
1. Grocery shopping
Once you have assessed your financial situation by creating a budget, it is a good idea
a. Before going grocery shopping make a shopping list to resist the temptation to pick up stuff you don’t actually need. b. Always look out for special offers and, where possible, buy in bulk items that will
to look at the following general rules about saving. 1. Do you have any debts? If you have debts, especially expensive debts such as credit cards, it is usually better to pay off these first before saving, because the interest you pay on borrowed money is typically much higher than the interest rates you get on a
not go off. c. Buying ‘own brand’ products is normally cheaper. d. Try to avoid convenience food (such as prepared meals) as it usually costs much more than the cost of you making it.
savings account. This is especially true at the moment with savings rates at a record low and interest rates on credit card balances and overdrafts on the up. 2. Do you have any insurance? If you do not have any insurance to cover things like redundancy, illness or even death it is worth doing so to protect yourself and your
2. Often switching energy supplier will help save you money. It is also worth checking your energy bills when they come through, as many energy firms estimate your usage, so it is worth checking whether this is correct or not.
family. 3. Do you have any emergency funds? As life has the tendency to throw surprises at us, it is a good idea to have a certain amount of money stored away for any
3. Do you pay your bills with cash? If you do, set up your bills on Direct Debit or
unforeseen expenses that you have not planned for. A guideline amount would be to
Standing Order as you are often charged when you pay bills with cash or in store to
have between 3 and 6 months’ worth of expenses (rent, bills, food etc) saved up. It
cover the processing costs.
would be a good idea to keep this money in an easy access account in order to
4. Change your phone, TV and internet provider. It is always worth keeping an eye on
ensure that this can be dipped into in an emergency.
the latest telecommunications deals out there, as you may find there are some great deals to be had. If you have packages with Sky or Virgin Media you may want to think about downgrading the package you’re on in order to save some money. 5. See whether you can cut your insurance costs by visiting www.moneymadeclear. org.uk to compare the cost from different insurance providers. 6. See if your local area has a freecycle group – www.uk.freecycle.org
Money-making ideas 1. Do you have a spare room? If so, why not rent it out to generate some extra income? 2. Do you have any old mobiles around your house? If so, why not try and recycle them for cash? 3. Sell off any junk, old CDs/ DVDs or furniture you have just sitting around your house. 4. Do you have a parking space that you don’t use? Why not see whether anyone wants to buy it off you?
12
13
Exploring savings options
Once you have addressed your current financial situation, you may now be in a position to consider further savings and investments.
Types of saving accounts There are lots of different savings accounts available, but some will suit your specific needs better than others. Below are details about some of the different savings
What to look for when selecting a savings account Interest rates: Some savings accounts will offer higher interest rates for an initial period
accounts available in most, if not all, mainstream banks, building societies and your local Post Office. Read through them and work out which account is best for you.
Easy access accounts
which can then drop. Others have fixed rates or rates that go up depending on the
It is advisable to keep some money in an easy access account in order to cover any
amount deposited.
unforeseen or emergency costs you may have to incur. Easy access accounts can
Tax: The Government encourages us to save by giving certain tax-free incentives to do
typically be opened with as little as ÂŁ1.
so. This is currently being done through Individual Savings Accounts (ISAs). Make sure
Some easy access accounts provide you with a card that enables you to withdraw money
you take full advantage of such options and do not end up paying unnecessary tax.
from your savings 24/7. As a result of the instant availability of your savings, easy access
Most savings accounts automatically have tax taken off the interest when you receive
accounts typically offer lower interest rates than some other savings accounts and the
it. If you don’t pay tax you can arrange to stop this happening by speaking to your bank
rates tend to be variable as they are linked to the Bank of England base rate.
or building society.
Some of the best instant access accounts are with internet-only banks, which allow you
Notice periods: Some accounts require you to give a certain notice period for
access to your savings by transferring from a nominated current account. Transfers can
withdrawal of funds. These typically range from between 30-90 days.
take between 3-7 working days.
Time period: Certain accounts will require you to leave your savings in the account for a specified period in order to reap higher interest rates.
Notice accounts Notice accounts tend to offer a higher a rate of interest than easy access accounts, but
How interest is paid: Different savings accounts will pay interest
are less flexible. With notice accounts, you are required to give notice of your intention
differently. Interest is typically paid monthly or annually.
to withdraw. The length of this period usually ranges between 30 to 60 days. If you
Minimum deposits: Some accounts require you to make a specified minimum deposit, and may also require you to make a certain number of deposits in a given time period. Additional bonuses: Some accounts will offer certain bonuses either to open the account, or if you satisfy some other criteria. It is important that you read the small print and understand what is required to receive the benefit – and be ready to switch the money when any bonus period comes to an end.
withdraw money from your account before the notice period has passed, you will typically be penalised in the form of a loss of interest on the sum withdrawn for the length of notice required on the individual account. Having a notice period on your savings is advantageous in that it prevents you from just dipping in and out of your savings; however, it does mean that your money is tied up, making it hard to get hold of in case of emergency.
14
15
Exploring savings options
Once you have addressed your current financial situation, you may now be in a position to consider further savings and investments.
Types of saving accounts There are lots of different savings accounts available, but some will suit your specific needs better than others. Below are details about some of the different savings
What to look for when selecting a savings account Interest rates: Some savings accounts will offer higher interest rates for an initial period
accounts available in most, if not all, mainstream banks, building societies and your local Post Office. Read through them and work out which account is best for you.
Easy access accounts
which can then drop. Others have fixed rates or rates that go up depending on the
It is advisable to keep some money in an easy access account in order to cover any
amount deposited.
unforeseen or emergency costs you may have to incur. Easy access accounts can
Tax: The Government encourages us to save by giving certain tax-free incentives to do
typically be opened with as little as ÂŁ1.
so. This is currently being done through Individual Savings Accounts (ISAs). Make sure
Some easy access accounts provide you with a card that enables you to withdraw money
you take full advantage of such options and do not end up paying unnecessary tax.
from your savings 24/7. As a result of the instant availability of your savings, easy access
Most savings accounts automatically have tax taken off the interest when you receive
accounts typically offer lower interest rates than some other savings accounts and the
it. If you don’t pay tax you can arrange to stop this happening by speaking to your bank
rates tend to be variable as they are linked to the Bank of England base rate.
or building society.
Some of the best instant access accounts are with internet-only banks, which allow you
Notice periods: Some accounts require you to give a certain notice period for
access to your savings by transferring from a nominated current account. Transfers can
withdrawal of funds. These typically range from between 30-90 days.
take between 3-7 working days.
Time period: Certain accounts will require you to leave your savings in the account for a specified period in order to reap higher interest rates.
Notice accounts Notice accounts tend to offer a higher a rate of interest than easy access accounts, but
How interest is paid: Different savings accounts will pay interest
are less flexible. With notice accounts, you are required to give notice of your intention
differently. Interest is typically paid monthly or annually.
to withdraw. The length of this period usually ranges between 30 to 60 days. If you
Minimum deposits: Some accounts require you to make a specified minimum deposit, and may also require you to make a certain number of deposits in a given time period. Additional bonuses: Some accounts will offer certain bonuses either to open the account, or if you satisfy some other criteria. It is important that you read the small print and understand what is required to receive the benefit – and be ready to switch the money when any bonus period comes to an end.
withdraw money from your account before the notice period has passed, you will typically be penalised in the form of a loss of interest on the sum withdrawn for the length of notice required on the individual account. Having a notice period on your savings is advantageous in that it prevents you from just dipping in and out of your savings; however, it does mean that your money is tied up, making it hard to get hold of in case of emergency.
14
15
Fixed rate bonds
Other saving mechanisms
This type of account offers higher interest rates, but it involves you tying up your money
National Savings and Investments
for a fixed amount of time. Generally the longer the money is locked in, the higher the interest. These accounts are recommended for those who have spare money that they
National Savings and Investments (NS&I) are operated by the Government and offer a
can afford to lock away for a fixed period of time.
range of accounts, bonds and certificates.
Once you have placed your initial payment, most account providers will not allow you to
All products are capital secure, so investors receive their money back, whatever the
add any additional funds to your bond. The interest rate will be fixed from the date the
circumstances. They have a range of accounts that meet people’s different requirements.
account is opened until the maturity date. As a result, any increases or falls in the Bank
Some offer tax-free savings, others pay interest gross which savers will have to declare
of England base rate will not be reflected in your interest rate. You are not normally able
on their annual tax returns, while fixed rate savings bonds pay interest after the
to withdraw any money from these accounts during the fixed time period. If for some
deduction of 20% tax (cannot be reclaimed).
reason this is unavoidable, you will be penalised.
If security is a priority, NS&I are a good choice. Many of these products are also
Regular savings accounts
available in your local Post Office.
Regular savings accounts are designed for people who want to make regular deposits,
Individual Savings Accounts (ISAs)
usually of a set amount, into the account each month. These are useful accounts for
Tax free savings accounts such as ISAs are a useful way to save as all the income you
people who are trying to budget. Banks typically offer high interest rates on these
receive from these accounts is tax free. This can increase your income by a fifth (20%)
accounts, with some offering additional incentives for customers
if you are a basic rate tax payer. There are two types of ISA accounts which are very
who already hold current accounts with the bank.
different: a Cash ISA where the amount you deposit stays in cash and earns interest;
Most regular savings accounts are variable, so interest rates
and a Stocks and Share ISA which is an investment which can go up and down in value
will be increased or decreased within 30 days of the Bank
as well as paying an income.
of England base rate changes. But, obviously, this
In return for the Government allowing you to receive the income from your ISA tax free,
means savings rates will also go down if the base rate
you must keep to some simple rules. The main ones are that: you are only allowed to
goes down.
contribute a maximum of £10,200 each tax year into the account, of which only £5,100
Regular savings accounts typically have lots of
may be in a Cash ISA. You may withdraw your money whenever you wish, but once you
restrictions attached to them which, if broken, will result
have paid in the maximum amount, you must wait until the next tax year before paying
in a loss of interest. These restrictions may include: limits
in more.
on the number of withdrawals per year; no lump sum
You may have one Cash ISA and one Stocks and Shares ISA each tax year and you
deposits accepted; and maximum and minimum limits
can have them with different financial institutions or the same one. These limits do get
on your deposits each month.
changed quite regularly but the other rules have not changed for some time. In this
A regular savings account can be opened with as
section we will deal with Cash ISAs while we explain Stock and Share ISAs in our
little as £5 per month.
helpful jargon buster section.
16
17
Fixed rate bonds
Other saving mechanisms
This type of account offers higher interest rates, but it involves you tying up your money
National Savings and Investments
for a fixed amount of time. Generally the longer the money is locked in, the higher the interest. These accounts are recommended for those who have spare money that they
National Savings and Investments (NS&I) are operated by the Government and offer a
can afford to lock away for a fixed period of time.
range of accounts, bonds and certificates.
Once you have placed your initial payment, most account providers will not allow you to
All products are capital secure, so investors receive their money back, whatever the
add any additional funds to your bond. The interest rate will be fixed from the date the
circumstances. They have a range of accounts that meet people’s different requirements.
account is opened until the maturity date. As a result, any increases or falls in the Bank
Some offer tax-free savings, others pay interest gross which savers will have to declare
of England base rate will not be reflected in your interest rate. You are not normally able
on their annual tax returns, while fixed rate savings bonds pay interest after the
to withdraw any money from these accounts during the fixed time period. If for some
deduction of 20% tax (cannot be reclaimed).
reason this is unavoidable, you will be penalised.
If security is a priority, NS&I are a good choice. Many of these products are also
Regular savings accounts
available in your local Post Office.
Regular savings accounts are designed for people who want to make regular deposits,
Individual Savings Accounts (ISAs)
usually of a set amount, into the account each month. These are useful accounts for
Tax free savings accounts such as ISAs are a useful way to save as all the income you
people who are trying to budget. Banks typically offer high interest rates on these
receive from these accounts is tax free. This can increase your income by a fifth (20%)
accounts, with some offering additional incentives for customers
if you are a basic rate tax payer. There are two types of ISA accounts which are very
who already hold current accounts with the bank.
different: a Cash ISA where the amount you deposit stays in cash and earns interest;
Most regular savings accounts are variable, so interest rates
and a Stocks and Share ISA which is an investment which can go up and down in value
will be increased or decreased within 30 days of the Bank
as well as paying an income.
of England base rate changes. But, obviously, this
In return for the Government allowing you to receive the income from your ISA tax free,
means savings rates will also go down if the base rate
you must keep to some simple rules. The main ones are that: you are only allowed to
goes down.
contribute a maximum of £10,200 each tax year into the account, of which only £5,100
Regular savings accounts typically have lots of
may be in a Cash ISA. You may withdraw your money whenever you wish, but once you
restrictions attached to them which, if broken, will result
have paid in the maximum amount, you must wait until the next tax year before paying
in a loss of interest. These restrictions may include: limits
in more.
on the number of withdrawals per year; no lump sum
You may have one Cash ISA and one Stocks and Shares ISA each tax year and you
deposits accepted; and maximum and minimum limits
can have them with different financial institutions or the same one. These limits do get
on your deposits each month.
changed quite regularly but the other rules have not changed for some time. In this
A regular savings account can be opened with as
section we will deal with Cash ISAs while we explain Stock and Share ISAs in our
little as £5 per month.
helpful jargon buster section.
16
17
A cash ISA is really just an ordinary savings account where you receive interest but, because you keep to the rules, the government allows your interest to be tax free.
How safe are my savings?
Unless you want to use your ISA allowance for an investment it is probably a good idea
Having seen a significant number of banks and building societies fall into trouble over
to make an ISA your first savings account.
the last year or two, it is important that your savings are kept secure.
There are many financial institutions that provide ISAs and some of them do add some
Thanks to the Financial Services Compensation Scheme (FSCS), UK deposits in banks
extra rules such as notice periods to withdraw, or minimum deposits, but some start
or building societies currently regulated by the FSA are covered. Since 30 June 2009,
from just a £1 deposit. Make sure you check the terms before you apply, but don’t be
the deposit compensation limit is £50,000.
put off as they are very easy to use.
Further information on financial services compensation can be found at the FSCS
Credit Union savings
website www.fscs.org.uk
With a Credit Union, you can save as much or as little as you like; weekly, monthly or collection points, or directly from your wages.
What is the difference between savings and investments?
Credit Unions aim to pay a dividend on savings once a year to all their members
Savings are usually defined as accounts where you deposit money and the financial
depending on how profitable the Credit Union has been. These dividends typically range
institution (bank or building society) pays you interest for your
between 2% and 3% of your balance.
money. An investment, on the other hand, is where you buy
as often as you wish. Money can be deposited into your account in various different
a stake in a business or group of businesses, in return for Some Credit Unions also offer savings products
which they will give you a share of their profits.
such as Christmas savings accounts where you have to give notice if you want to take your money
Often, the value of your investment will go up and
out before November each year. This may be a
down, just as your income does, depending on the
good way of saving for Christmas as you may be
success of the business. For most investors, they don’t
less tempted to take out your money than with an ordinary savings account.
Investment
invest directly into a business, like the TV Dragons’ Den, but use a financial institution to package and manage the process.
For more information on saving with a Credit Union visit the About Credit Unions section on the ABCUL website www.abcul.org
Please visit the jargon buster at the back of this guide for clear and simple explanations of some of the investment terms discussed in this section.
18
19
A cash ISA is really just an ordinary savings account where you receive interest but, because you keep to the rules, the government allows your interest to be tax free.
How safe are my savings?
Unless you want to use your ISA allowance for an investment it is probably a good idea
Having seen a significant number of banks and building societies fall into trouble over
to make an ISA your first savings account.
the last year or two, it is important that your savings are kept secure.
There are many financial institutions that provide ISAs and some of them do add some
Thanks to the Financial Services Compensation Scheme (FSCS), UK deposits in banks
extra rules such as notice periods to withdraw, or minimum deposits, but some start
or building societies currently regulated by the FSA are covered. Since 30 June 2009,
from just a £1 deposit. Make sure you check the terms before you apply, but don’t be
the deposit compensation limit is £50,000.
put off as they are very easy to use.
Further information on financial services compensation can be found at the FSCS
Credit Union savings
website www.fscs.org.uk
With a Credit Union, you can save as much or as little as you like; weekly, monthly or collection points, or directly from your wages.
What is the difference between savings and investments?
Credit Unions aim to pay a dividend on savings once a year to all their members
Savings are usually defined as accounts where you deposit money and the financial
depending on how profitable the Credit Union has been. These dividends typically range
institution (bank or building society) pays you interest for your
between 2% and 3% of your balance.
money. An investment, on the other hand, is where you buy
as often as you wish. Money can be deposited into your account in various different
a stake in a business or group of businesses, in return for Some Credit Unions also offer savings products
which they will give you a share of their profits.
such as Christmas savings accounts where you have to give notice if you want to take your money
Often, the value of your investment will go up and
out before November each year. This may be a
down, just as your income does, depending on the
good way of saving for Christmas as you may be
success of the business. For most investors, they don’t
less tempted to take out your money than with an ordinary savings account.
Investment
invest directly into a business, like the TV Dragons’ Den, but use a financial institution to package and manage the process.
For more information on saving with a Credit Union visit the About Credit Unions section on the ABCUL website www.abcul.org
Please visit the jargon buster at the back of this guide for clear and simple explanations of some of the investment terms discussed in this section.
18
19
Why should I invest?
For example if you put £10,000 in a savings account in December 1959 and left it for 15
As with savings, by deciding to invest you are making positive steps to secure your
end of the period, i.e. your original investment of £10,000 plus £5,250 interest.
future income. So why is it so hard for us to do it? Often, people are put off from investing as they see it as more complicated than simply putting your money in a savings account. However, as we hope this guide will show, investing doesn’t have to be overly complicated and can be a really good way of making your money work for you. This section aims to provide clear and understandable information about some of the investment jargon used, and where to go to find information to help you make the right decision about your money.
years based on the average interest rate you would have £15,250 in the account at the
However, if you had invested £10,000 in the stock market over the same period you would on average have received dividends of approximately £5,000 and your investment would also have grown by £8,000, i.e. your account would be worth a total of £23,000. This shows that if you are putting money aside for a long time then an investment could be a good choice. So if you are saving for your retirement over say, 30 or 40 years, then investing will most likely be better for you. Also, if you want to put a sum of money aside for your child’s wedding or university fees, an investment may be suitable.
Real rate of return This concept is often a difficult one to grasp. £1 in 1990 is not worth the same as £1 today, due to inflation. Simplified, inflation means the value of your money will decrease over time as the price of goods and services rise. It therefore does not make sense to leave a big portion of our savings in no or low-interest bank accounts that don’t beat inflation. By choosing to invest some of your money, it may help you to stretch your savings further than simply keeping it in a savings account.
The important aspect to think about is how long the money will be invested for and whether you are likely to need access to it quickly. If the value of your investment has gone down when you need to draw it out, it may be better to wait for it to go back up in value.
Investment horizon and risk/return When you are investing, you ought to consider what your investment horizon is. Your
Investment scenarios The main reason that people make investments rather than put all their money into savings accounts is that the amount that you get back over a long period of time is usually much greater. This is because, in
investment horizon is the length of time your money is to be invested for. With life expectancy creeping up, you should try to take a long term view when you are investing your money. Furthermore, having a long term view can make short term swings in your investment portfolio irrelevant, and you therefore have no need to constantly look up the last quote of your investments.
general, as well as receiving a dividend every year the value of your investment
There is no such thing as a no-risk investment and, in many cases, your capital (or the
will increase (capital growth). This can
amount you initially invest) may not be guaranteed. The higher the perceived risk, the
only really be relied upon when an
higher the potential return is. Conversely the lower the risk, the lower the potential
investment is made over a longer
return. As mentioned previously, when investing in stocks and shares it is important to
period of time to smooth out the
take a long term view as these markets can often be volatile in the short term. Although
ups and downs of the value of your
there is no guarantee, short term losses are often ironed out in the long term as markets
investment.
recover or grow.
20
21
Why should I invest?
For example if you put £10,000 in a savings account in December 1959 and left it for 15
As with savings, by deciding to invest you are making positive steps to secure your
end of the period, i.e. your original investment of £10,000 plus £5,250 interest.
future income. So why is it so hard for us to do it? Often, people are put off from investing as they see it as more complicated than simply putting your money in a savings account. However, as we hope this guide will show, investing doesn’t have to be overly complicated and can be a really good way of making your money work for you. This section aims to provide clear and understandable information about some of the investment jargon used, and where to go to find information to help you make the right decision about your money.
years based on the average interest rate you would have £15,250 in the account at the
However, if you had invested £10,000 in the stock market over the same period you would on average have received dividends of approximately £5,000 and your investment would also have grown by £8,000, i.e. your account would be worth a total of £23,000. This shows that if you are putting money aside for a long time then an investment could be a good choice. So if you are saving for your retirement over say, 30 or 40 years, then investing will most likely be better for you. Also, if you want to put a sum of money aside for your child’s wedding or university fees, an investment may be suitable.
Real rate of return This concept is often a difficult one to grasp. £1 in 1990 is not worth the same as £1 today, due to inflation. Simplified, inflation means the value of your money will decrease over time as the price of goods and services rise. It therefore does not make sense to leave a big portion of our savings in no or low-interest bank accounts that don’t beat inflation. By choosing to invest some of your money, it may help you to stretch your savings further than simply keeping it in a savings account.
The important aspect to think about is how long the money will be invested for and whether you are likely to need access to it quickly. If the value of your investment has gone down when you need to draw it out, it may be better to wait for it to go back up in value.
Investment horizon and risk/return When you are investing, you ought to consider what your investment horizon is. Your
Investment scenarios The main reason that people make investments rather than put all their money into savings accounts is that the amount that you get back over a long period of time is usually much greater. This is because, in
investment horizon is the length of time your money is to be invested for. With life expectancy creeping up, you should try to take a long term view when you are investing your money. Furthermore, having a long term view can make short term swings in your investment portfolio irrelevant, and you therefore have no need to constantly look up the last quote of your investments.
general, as well as receiving a dividend every year the value of your investment
There is no such thing as a no-risk investment and, in many cases, your capital (or the
will increase (capital growth). This can
amount you initially invest) may not be guaranteed. The higher the perceived risk, the
only really be relied upon when an
higher the potential return is. Conversely the lower the risk, the lower the potential
investment is made over a longer
return. As mentioned previously, when investing in stocks and shares it is important to
period of time to smooth out the
take a long term view as these markets can often be volatile in the short term. Although
ups and downs of the value of your
there is no guarantee, short term losses are often ironed out in the long term as markets
investment.
recover or grow.
20
21
As investing can often require a certain amount of risk-taking you may want to ask
There are lots of financial institutions who will be very pleased to sell you an investment.
yourself the following question to help you understand what level of risk you are
There are also financial advisers who will be keen to arrange it for you. It is important
prepared to take.
to remember that their job is to sell to you, but they are required by law to provide certain
Which statement best describes your attitude to investing your money? 1. I could not accept that my investment may go down in value, even in the short term.
information to help you make a decision. If you go to a bank or building society, they will usually only be able to sell you investments from their own company and the same applies to a tied financial adviser who works for a particular financial institution.
2. I could accept some movement up and down in the value of my investment over time.
In both these situations, the advice that you receive should be of a good quality, but the investment that you will be offered will be restricted to the one company. To obtain
3. I could accept that I could potentially lose all or most of my invested capital.
advice and the opportunity to choose between the best performing investments, you will need to speak to an Independent Financial Adviser (IFA).
These statements can be seen to broadly represent the three categories of low-risk, medium-risk and high-risk respectively. Whatever
It is important to speak to qualified and independent financial
category you find yourself in, it will help to give an
advisers when considering any investments, and it can be a
indication of how much risk you are prepared to take
good idea to speak to more than one adviser. However, to
with your investments. Whatever your answer, you should be sure that
seek specialised advice
your investment decisions reflect these priorities or goals.
you may have to pay for it. To find an independent
How do I make an investment?
financial adviser, visit the Association of Independent Financial Advisers (AIFA) website at
The best way to invest is via a discount stockbroker with low
http://www.aifa.net/consumer-area/
transaction fees so that you can maximise your returns. You can ask a financial adviser or investment manager to buy or sell shares for you, but they will still go through a stockbroker. Generally, you should to aim pay less than 2% of your overall investment in fees. To get an idea of how markets operate and function, it may be useful to do your own primary research – for example, you could consult the money and business sections in daily newspapers such as the Financial Times to get an overview of the sector. Increasing your understanding about investments will ultimately help you choose the right investments for your situation and goals. Indeed, with a greater comprehension, you could eventually start to invest yourself directly. This allows you to take bigger risks and maybe make greater returns, but you have to know what you’re doing, and be aware that you can lose as well as win. 22
23
As investing can often require a certain amount of risk-taking you may want to ask
There are lots of financial institutions who will be very pleased to sell you an investment.
yourself the following question to help you understand what level of risk you are
There are also financial advisers who will be keen to arrange it for you. It is important
prepared to take.
to remember that their job is to sell to you, but they are required by law to provide certain
Which statement best describes your attitude to investing your money? 1. I could not accept that my investment may go down in value, even in the short term.
information to help you make a decision. If you go to a bank or building society, they will usually only be able to sell you investments from their own company and the same applies to a tied financial adviser who works for a particular financial institution.
2. I could accept some movement up and down in the value of my investment over time.
In both these situations, the advice that you receive should be of a good quality, but the investment that you will be offered will be restricted to the one company. To obtain
3. I could accept that I could potentially lose all or most of my invested capital.
advice and the opportunity to choose between the best performing investments, you will need to speak to an Independent Financial Adviser (IFA).
These statements can be seen to broadly represent the three categories of low-risk, medium-risk and high-risk respectively. Whatever
It is important to speak to qualified and independent financial
category you find yourself in, it will help to give an
advisers when considering any investments, and it can be a
indication of how much risk you are prepared to take
good idea to speak to more than one adviser. However, to
with your investments. Whatever your answer, you should be sure that
seek specialised advice
your investment decisions reflect these priorities or goals.
you may have to pay for it. To find an independent
How do I make an investment?
financial adviser, visit the Association of Independent Financial Advisers (AIFA) website at
The best way to invest is via a discount stockbroker with low
http://www.aifa.net/consumer-area/
transaction fees so that you can maximise your returns. You can ask a financial adviser or investment manager to buy or sell shares for you, but they will still go through a stockbroker. Generally, you should to aim pay less than 2% of your overall investment in fees. To get an idea of how markets operate and function, it may be useful to do your own primary research – for example, you could consult the money and business sections in daily newspapers such as the Financial Times to get an overview of the sector. Increasing your understanding about investments will ultimately help you choose the right investments for your situation and goals. Indeed, with a greater comprehension, you could eventually start to invest yourself directly. This allows you to take bigger risks and maybe make greater returns, but you have to know what you’re doing, and be aware that you can lose as well as win. 22
23
Investment options Beware!!
There are a couple of alternatives out there, but here we will only mention the most
If you are contacted ‘out of the blue’ by somebody inviting you to invest in
relevant ones – stocks and shares, and managed funds.
shares, beware – these may be share scams, also known as boiler room scams.
Stocks and shares: Usually the same, these are investments directly into a business,
Never agree to anything unless you have done plenty of research on a company
literally a share of the business. You can often buy and sell them quite easily, particularly
or spoken to an independent financial adviser. Contact Moneymadeclear on 0300
if they are listed on a stock market. There are two ways of earning an income: price
500 5000 to find out more about a specific company or to report a bogus firm.
accumulation and dividends. The aim is for the value of your shares to grow over time as the value of the company increases in line with its profitability and growth. Managed fund: An investment fund, often a Unit Trust, OEIC or ISA, is where the
Savings
stocks and shares that the fund invests in are managed by a professional investment manager. The fund will be managed to achieve certain goals and targets which will be clearly highlighted; for example, as much income as possible.
Income you earn from savings is generally subject to income tax. The main accounts which are exempt from tax are ISAs, and some National Savings and Investment
Again, your independent financial adviser will be able to talk you through various
Tax on savings and investments
accounts.
investment options so that you can decide what is best for you and your priorities. Savings interest normally has tax taken off at 20 per
How much should I invest? The first aspect to remember is that investments are long term and you should always make sure that you have some money that you can get hold of in an emergency. Most advisers would suggest that you should try to keep between 3 and 6 months’ worth of expenses (rent, bills, food etc) in a savings account with some of it available immediately and some perhaps on a month’s notice to get a higher
cent before you receive it. This is confirmed by the entry ‘net interest’ on your bank or building society statement. If you’re a higher rate taxpayer, you owe tax on the difference. If you have a low income you may be able to claim tax back. Savings income is added to your other sources of income and taxed after your tax free allowances have been taken into account. The following tax structure applies:
•
All income of less than £2,440 [including income from savings] will be taxed at 10%
•
Income that is above £2,440, but less than the £37,400 basic rate Income Tax band, is taxed at 20%
interest rate. You then may wish to think about why you are investing. If it
•
Income that is above the £37,400 but less than the £150,000 Income Tax band will be taxed at 40%
is for something specific, like university fees, you may want to calculate how much you need to invest each month to ensure you will have enough. Financial advisers can help you
•
Income that is above the £150,000 Income Tax band will be taxed at 50%
by providing forecasts, but you will probably need to review
All of the above figures apply to the
how much you are investing regularly to ensure that it
2010-2011 tax year.
reaches your target.
24
25
Investment options Beware!!
There are a couple of alternatives out there, but here we will only mention the most
If you are contacted ‘out of the blue’ by somebody inviting you to invest in
relevant ones – stocks and shares, and managed funds.
shares, beware – these may be share scams, also known as boiler room scams.
Stocks and shares: Usually the same, these are investments directly into a business,
Never agree to anything unless you have done plenty of research on a company
literally a share of the business. You can often buy and sell them quite easily, particularly
or spoken to an independent financial adviser. Contact Moneymadeclear on 0300
if they are listed on a stock market. There are two ways of earning an income: price
500 5000 to find out more about a specific company or to report a bogus firm.
accumulation and dividends. The aim is for the value of your shares to grow over time as the value of the company increases in line with its profitability and growth. Managed fund: An investment fund, often a Unit Trust, OEIC or ISA, is where the
Savings
stocks and shares that the fund invests in are managed by a professional investment manager. The fund will be managed to achieve certain goals and targets which will be clearly highlighted; for example, as much income as possible.
Income you earn from savings is generally subject to income tax. The main accounts which are exempt from tax are ISAs, and some National Savings and Investment
Again, your independent financial adviser will be able to talk you through various
Tax on savings and investments
accounts.
investment options so that you can decide what is best for you and your priorities. Savings interest normally has tax taken off at 20 per
How much should I invest? The first aspect to remember is that investments are long term and you should always make sure that you have some money that you can get hold of in an emergency. Most advisers would suggest that you should try to keep between 3 and 6 months’ worth of expenses (rent, bills, food etc) in a savings account with some of it available immediately and some perhaps on a month’s notice to get a higher
cent before you receive it. This is confirmed by the entry ‘net interest’ on your bank or building society statement. If you’re a higher rate taxpayer, you owe tax on the difference. If you have a low income you may be able to claim tax back. Savings income is added to your other sources of income and taxed after your tax free allowances have been taken into account. The following tax structure applies:
•
All income of less than £2,440 [including income from savings] will be taxed at 10%
•
Income that is above £2,440, but less than the £37,400 basic rate Income Tax band, is taxed at 20%
interest rate. You then may wish to think about why you are investing. If it
•
Income that is above the £37,400 but less than the £150,000 Income Tax band will be taxed at 40%
is for something specific, like university fees, you may want to calculate how much you need to invest each month to ensure you will have enough. Financial advisers can help you
•
Income that is above the £150,000 Income Tax band will be taxed at 50%
by providing forecasts, but you will probably need to review
All of the above figures apply to the
how much you are investing regularly to ensure that it
2010-2011 tax year.
reaches your target.
24
25
If you do not pay income tax, you will need to fill in an R85 form, and receive your
Most people who have worked in the UK will be eligible for a basic State Pension. This
interest gross (without tax being taken off). You can get the form from your bank or
is based on National Insurance contributions you have paid throughout your time in
building society.
work. If you have certain contribution gaps in your record, it may be possible to fill them
You may find that your savings interest pushes you from
in order to get a better State Pension.
one tax band to another. You must bear this in mind as you
To check whether you have any
will not earn quite as much as you may have expected or
gaps in your contribution record,
you may receive an unexpected tax bill.
visit www.direct.gov.uk and search for a State Pension forecast.
Investments
For those who are on a low income
Any income that you make from investments will be taxable. Tax on investments can be quite complex so you should seek further explanatory information on investments tax. For more information on savings and investments tax visit the Tax on Savings and Investments section of the Directgov website www.direct.gov.uk or speak to an independent financial adviser.
when at retirement age, you may be entitled to a Pension Credit. The full basic State Pension is £95.25 per week in 2010/11 but this figure changes annually so it is always sensible to check what the current figures are. The State Pension age is currently at 65 for men and 60 for women. The State Pension age for women born on or after 6 April 1950 but before 6 April 1955 is rising from 60 to 65 between 2010 and 2020. The State Pension age for women born on or
A pension is a long-term investment that
Pensions
provides you with an income when you retire,
after 6 April 1955 but before 6 April 1959 is 65. State Pension age will increase for both men and women from age 65 to 68 between 2024 and 2046.
called an annuity. What happens when you
The additional State Pension, or State Second Pension, is paid in addition to the basic
reach retirement age is that you will have a
State Pension and is earnings related. You can start getting any additional State
pension ‘pot’ with a certain value. You are able
Pension when you claim your basic State Pension. Your entitlement to additional State
to take 25% of this as a cash lump sum. With the
Pension is calculated when you claim the basic State Pension. The Pension Service will
balance you buy an annuity which gives you a certain sum
normally send you the relevant forms and invite you to make a claim about four months
of money each year. You do not have to buy this from the same provider you had
before you reach State Pension age. If you don’t receive a letter inviting you to claim
your pension with and because you have various options (such as having payments
your pension, get in touch with the Pensions Service or visit www.direct.gov.uk
linked to inflation) it is best to seek advice. Most heavyweight newspapers regularly
Further information on the State Pension, the State Second Pension, and your
carry “Best Annuity Rate Tables” in their personal finance sections.
entitlements can be located in the Pensions and Retirement Planning section of
All money that you invest into your pension is exempt of tax. As a result investing £100
the Directgov website www.direct.gov.uk, while general information on pensions
into your pension will only cost you £80 after tax if you are a basic rate tax payer. In most
can be found at www.moneymadeclear.org.uk
cases the money you have invested cannot be touched until you have reached 50 – and this is likely to rise higher in the next few years. 26
27
If you do not pay income tax, you will need to fill in an R85 form, and receive your
Most people who have worked in the UK will be eligible for a basic State Pension. This
interest gross (without tax being taken off). You can get the form from your bank or
is based on National Insurance contributions you have paid throughout your time in
building society.
work. If you have certain contribution gaps in your record, it may be possible to fill them
You may find that your savings interest pushes you from
in order to get a better State Pension.
one tax band to another. You must bear this in mind as you
To check whether you have any
will not earn quite as much as you may have expected or
gaps in your contribution record,
you may receive an unexpected tax bill.
visit www.direct.gov.uk and search for a State Pension forecast.
Investments
For those who are on a low income
Any income that you make from investments will be taxable. Tax on investments can be quite complex so you should seek further explanatory information on investments tax. For more information on savings and investments tax visit the Tax on Savings and Investments section of the Directgov website www.direct.gov.uk or speak to an independent financial adviser.
when at retirement age, you may be entitled to a Pension Credit. The full basic State Pension is £95.25 per week in 2010/11 but this figure changes annually so it is always sensible to check what the current figures are. The State Pension age is currently at 65 for men and 60 for women. The State Pension age for women born on or after 6 April 1950 but before 6 April 1955 is rising from 60 to 65 between 2010 and 2020. The State Pension age for women born on or
A pension is a long-term investment that
Pensions
provides you with an income when you retire,
after 6 April 1955 but before 6 April 1959 is 65. State Pension age will increase for both men and women from age 65 to 68 between 2024 and 2046.
called an annuity. What happens when you
The additional State Pension, or State Second Pension, is paid in addition to the basic
reach retirement age is that you will have a
State Pension and is earnings related. You can start getting any additional State
pension ‘pot’ with a certain value. You are able
Pension when you claim your basic State Pension. Your entitlement to additional State
to take 25% of this as a cash lump sum. With the
Pension is calculated when you claim the basic State Pension. The Pension Service will
balance you buy an annuity which gives you a certain sum
normally send you the relevant forms and invite you to make a claim about four months
of money each year. You do not have to buy this from the same provider you had
before you reach State Pension age. If you don’t receive a letter inviting you to claim
your pension with and because you have various options (such as having payments
your pension, get in touch with the Pensions Service or visit www.direct.gov.uk
linked to inflation) it is best to seek advice. Most heavyweight newspapers regularly
Further information on the State Pension, the State Second Pension, and your
carry “Best Annuity Rate Tables” in their personal finance sections.
entitlements can be located in the Pensions and Retirement Planning section of
All money that you invest into your pension is exempt of tax. As a result investing £100
the Directgov website www.direct.gov.uk, while general information on pensions
into your pension will only cost you £80 after tax if you are a basic rate tax payer. In most
can be found at www.moneymadeclear.org.uk
cases the money you have invested cannot be touched until you have reached 50 – and this is likely to rise higher in the next few years. 26
27
Despite getting some provision by the government through the State Pension, it is
There is a range of personal and stakeholder
usually a good idea to also sign up for a pension scheme at work because your
pensions available to individuals. For more
employer may also make contributions to your pension fund, and you often get other
information on the products available visit
benefits as well. This may be provided by your employer or it could be a private scheme
the CFEB’s Moneymadeclear website –
such as a stakeholder pension.
www.moneymadeclear.org.uk
If you are not already enrolled in a workplace pension scheme, speak to your employer
There are other options available to you in retirement. You
as soon as possible. The tax benefits and needs in old age make it important to take out
may choose to use investments to fund your retirement,
a pension plan if at all possible. If you work for a small business with fewer than five
or sell off insurance policies or investments, or sell
employees, your employer is not legally obliged to offer a pension scheme, but it is
off your house and downsize. You must
worth checking to see whether a pension scheme is offered. By 2012 the government
bear all these in mind when considering
plans to introduce an obligatory pension scheme for all employers.
what steps to take. There is a lot of free information on your different options in retirement, but if you want to seek specialised advice, you may have to pay to see an authorised financial adviser.
Personal Accounts The personal accounts scheme is being created by the government to provide a low-cost, independent, workplace pension scheme that any employer can
Making a Will is important for everybody yet millions of
use. It aims to provide access to workplace pension saving to millions of
people in the UK die with no Will or an out of date one.
people – typically those on low to middle incomes who don’t currently
It is not just about money and possessions, though
participate in a workplace pension scheme. The Government is placing a duty
these are important, it is also about who will look after
on employers to automatically enrol eligible workers into a pension scheme
any children you have and what sor t of funeral
that meets certain criteria and to make a contribution into the scheme.
arrangements you want. If you really want to make sure
Key Facts – Personal Accounts are:
Wills
you know where your money and possessions will go after you die you must make a Will!
•
a trust-based occupational pension scheme regulated by The Pensions Unless your Will is going to be very simple it is advisable to consult a solicitor, especially
Regulator
if you intend to leave significant sums to people other than those who might expect to
•
run in the interests of its members by a not-for-profit trustee corporation
inherit, e.g. husband, wife or children. A solicitor may be prepared to visit you in your
•
easy and low-cost for employers to administer
own home, care home or hospital. The cost of making a Will varies according to its
and with low charges for members
complexity. Ask at the outset what the cost will be.
ready for the onset of employer duties in 2012
Making a Will can seem expensive. But remember that the legal costs of sorting out the
•
For more information on Personal Accounts please visit
mess and muddle after you die can be much more than the price of a properly drawn up Will.
http://www.padeliveryauthority.org.uk/
Look out for a ‘Free Wills Week’ in your area where you can make an appointment to
personal-accounts.asp
see one of many solicitors across the country who will draft you a Will at no charge provided you’re over 55, and instead will ask for a donation to one of 10 charities. 28
29
Despite getting some provision by the government through the State Pension, it is
There is a range of personal and stakeholder
usually a good idea to also sign up for a pension scheme at work because your
pensions available to individuals. For more
employer may also make contributions to your pension fund, and you often get other
information on the products available visit
benefits as well. This may be provided by your employer or it could be a private scheme
the CFEB’s Moneymadeclear website –
such as a stakeholder pension.
www.moneymadeclear.org.uk
If you are not already enrolled in a workplace pension scheme, speak to your employer
There are other options available to you in retirement. You
as soon as possible. The tax benefits and needs in old age make it important to take out
may choose to use investments to fund your retirement,
a pension plan if at all possible. If you work for a small business with fewer than five
or sell off insurance policies or investments, or sell
employees, your employer is not legally obliged to offer a pension scheme, but it is
off your house and downsize. You must
worth checking to see whether a pension scheme is offered. By 2012 the government
bear all these in mind when considering
plans to introduce an obligatory pension scheme for all employers.
what steps to take. There is a lot of free information on your different options in retirement, but if you want to seek specialised advice, you may have to pay to see an authorised financial adviser.
Personal Accounts The personal accounts scheme is being created by the government to provide a low-cost, independent, workplace pension scheme that any employer can
Making a Will is important for everybody yet millions of
use. It aims to provide access to workplace pension saving to millions of
people in the UK die with no Will or an out of date one.
people – typically those on low to middle incomes who don’t currently
It is not just about money and possessions, though
participate in a workplace pension scheme. The Government is placing a duty
these are important, it is also about who will look after
on employers to automatically enrol eligible workers into a pension scheme
any children you have and what sor t of funeral
that meets certain criteria and to make a contribution into the scheme.
arrangements you want. If you really want to make sure
Key Facts – Personal Accounts are:
Wills
you know where your money and possessions will go after you die you must make a Will!
•
a trust-based occupational pension scheme regulated by The Pensions Unless your Will is going to be very simple it is advisable to consult a solicitor, especially
Regulator
if you intend to leave significant sums to people other than those who might expect to
•
run in the interests of its members by a not-for-profit trustee corporation
inherit, e.g. husband, wife or children. A solicitor may be prepared to visit you in your
•
easy and low-cost for employers to administer
own home, care home or hospital. The cost of making a Will varies according to its
and with low charges for members
complexity. Ask at the outset what the cost will be.
ready for the onset of employer duties in 2012
Making a Will can seem expensive. But remember that the legal costs of sorting out the
•
For more information on Personal Accounts please visit
mess and muddle after you die can be much more than the price of a properly drawn up Will.
http://www.padeliveryauthority.org.uk/
Look out for a ‘Free Wills Week’ in your area where you can make an appointment to
personal-accounts.asp
see one of many solicitors across the country who will draft you a Will at no charge provided you’re over 55, and instead will ask for a donation to one of 10 charities. 28
29
Conclusion
Before you start to consider savings or
Annual Equivalent Rate (AER) The interest you
investments, it is imperative that you have
would earn in a year if you left all your monthly interest
your finances in order – if you have any
in your savings account and you earn interest on the
outstanding debts then you should pay these off
interest added during the year. Usually, the higher the rate,
first, and then make sure you have between 3-6 months worth of monthly expenses saved up, in case of any unexpected events.
the better. Annual Percentage Rate (APR) The actual yearly
Creating and sticking to a budget will help you organise your personal finances and
cost of a loan, including interest and charges. Usually,
allow you to figure out how much you can put aside each month for saving. Use the free
the lower the rate, the better.
Moneybasics Spendometer to help you to keep track of your daily finances, wherever you are – www.creditaction.org.uk When it comes to saving for the future there are many choices available. It will therefore
Jargon buster
Assets Things that are owned such as cars, property and money. Base rate The base interest rate determined usually by a country’s central bank (such as the Bank of England) upon which other lending or savings interest rates are based.
be important that you choose the option that suits you best depending on what you are saving for (short/medium or long-term goals). Visit www.moneymadeclear.org.uk and use the comparison tables to help you choose
Bonds Bonds are essentially agreements to tie up your money for a certain period of time. These are issued by governments, companies and banks and are for a fixed period. They can offer either fixed or variable rates of interest.
the best option out there. If you are interested in investing, then seek impartial advice from an independent financial adviser to help you make the best choice for your
Capital The total of a person’s or a business’s assets, less the liabilities.
needs.
Capital growth The increase in value of your investment from when you buy to when
Finally, always keep sight of what you are saving for and remember the benefits it will
you sell. If the value were to decrease this would be capital loss.
bring. By saving now, you can buy products and services at a much cheaper price than
Compound interest Compound interest is interest earned on interest and makes a
if you used credit, and you can protect yourself in the event
huge difference to the value of long term savings. Say you’ve invested £100, which is
of redundancy or other unexpected life events.
earning 10% interest each year:
Whether you are saving for a new car, your child’s
Year 1 – you earn 10% on £100 = £110
education or a summer holiday, by saving you
Year 2 – instead of earning another 10% on your £100, you earn 10% on £110 = £121
can say goodbye to worrying about credit
Year 3 – you earn 10% on £121 = £133.10
card bills and other loan repayments and
And so on, so the longer you leave it, the more you benefit from compounding.
hello to a brighter financial future!
Consumer Financial Education Body (CFEB) CFEB is an independent body, established by the Financial Services Authority in 2010, which aims to help consumers understand financial matters and manage their finances better. They provide free, impartial information, education and guidance to consumers through their dedicated website www.moneymadeclear.org.uk Deposit account An account with a bank or building society, which pays a variable rate of interest. Higher rates are often available if you are willing to give notice before withdrawing your money.
30
31
Conclusion
Before you start to consider savings or
Annual Equivalent Rate (AER) The interest you
investments, it is imperative that you have
would earn in a year if you left all your monthly interest
your finances in order – if you have any
in your savings account and you earn interest on the
outstanding debts then you should pay these off
interest added during the year. Usually, the higher the rate,
first, and then make sure you have between 3-6 months worth of monthly expenses saved up, in case of any unexpected events.
the better. Annual Percentage Rate (APR) The actual yearly
Creating and sticking to a budget will help you organise your personal finances and
cost of a loan, including interest and charges. Usually,
allow you to figure out how much you can put aside each month for saving. Use the free
the lower the rate, the better.
Moneybasics Spendometer to help you to keep track of your daily finances, wherever you are – www.creditaction.org.uk When it comes to saving for the future there are many choices available. It will therefore
Jargon buster
Assets Things that are owned such as cars, property and money. Base rate The base interest rate determined usually by a country’s central bank (such as the Bank of England) upon which other lending or savings interest rates are based.
be important that you choose the option that suits you best depending on what you are saving for (short/medium or long-term goals). Visit www.moneymadeclear.org.uk and use the comparison tables to help you choose
Bonds Bonds are essentially agreements to tie up your money for a certain period of time. These are issued by governments, companies and banks and are for a fixed period. They can offer either fixed or variable rates of interest.
the best option out there. If you are interested in investing, then seek impartial advice from an independent financial adviser to help you make the best choice for your
Capital The total of a person’s or a business’s assets, less the liabilities.
needs.
Capital growth The increase in value of your investment from when you buy to when
Finally, always keep sight of what you are saving for and remember the benefits it will
you sell. If the value were to decrease this would be capital loss.
bring. By saving now, you can buy products and services at a much cheaper price than
Compound interest Compound interest is interest earned on interest and makes a
if you used credit, and you can protect yourself in the event
huge difference to the value of long term savings. Say you’ve invested £100, which is
of redundancy or other unexpected life events.
earning 10% interest each year:
Whether you are saving for a new car, your child’s
Year 1 – you earn 10% on £100 = £110
education or a summer holiday, by saving you
Year 2 – instead of earning another 10% on your £100, you earn 10% on £110 = £121
can say goodbye to worrying about credit
Year 3 – you earn 10% on £121 = £133.10
card bills and other loan repayments and
And so on, so the longer you leave it, the more you benefit from compounding.
hello to a brighter financial future!
Consumer Financial Education Body (CFEB) CFEB is an independent body, established by the Financial Services Authority in 2010, which aims to help consumers understand financial matters and manage their finances better. They provide free, impartial information, education and guidance to consumers through their dedicated website www.moneymadeclear.org.uk Deposit account An account with a bank or building society, which pays a variable rate of interest. Higher rates are often available if you are willing to give notice before withdrawing your money.
30
31
Distribution The payments of any investment income generated by a fund, usually
Independent Financial Adviser (IFA) A qualified professional authorised to advise on
made either half-yearly or quarterly. You can choose to have each distribution paid to
savings, investment and pension products. It is usually best to seek advice from an
you or to reinvest it in the fund for greater capital growth.
adviser who is not tied to just one company but can recommend from the full range of
Dividend The income received on a share which will normally be based on the profits of the business. Some investments may have a fixed dividend. Earnings per share The return on equity investments. Any figure quoted represents
products available. Investment income The portion of a company’s or an individual’s income which is derived from its investments, including interest and dividends on stocks and bonds.
the total amount of a company’s earnings (after deductions) divided by the number of
Investment fund A fund set up by financial institutions to invest in certain types of
ordinary shares it has issued.
businesses, perhaps by location of the business or type of industry. Instead of buying shares in the businesses directly investors buy a share in the fund. They receive income
Equity
•
A shareholding in a limited company. By extension, ‘equities’ is generally used to mean the whole range of shares traded on a Stock Exchange
•
on the performance of the whole fund and can buy and sell depending of the value of the whole fund.
The amount by which the value of a house exceeds the total of the loans secured by
Managed fund An investment fund, often a Unit Trust, OEIC or
mortgage(s) thereon
ISA, where the stocks and shares that the fund invests in are
Ethical investments Shares or similar investments (for example, holdings in unit trusts) in companies who have committed to conform to a particular set of moral or
managed by a professional investment manager. The fund will be managed to achieve certain goals and targets which will be clearly
ethical principles.
highlighted; for example, as much Financial Services Authority (FSA) The FSA currently regulates most financial services markets, exchanges and firms in the UK and, together with HM Treasury and the Bank of England, they assist in supporting the overall financial stability of the economy. However, the Bank of England is expected to assume control of the FSA’s
income as possible. Maturity date The date on which a payment becomes due at the end of the term of an endowment policy or a fixed term bond or loan.
regulatory functions in the near future. FT-SE There are various indices based on companies quoted in the Financial Times. The purpose of these is to provide a benchmark of the performance of the stock market
Maturity value The amount payable to the insured at the maturity date of an endowment policy.
as a whole. This benchmark is often used to measure the effectiveness of a fund
Net income Income gained through savings or investments are
manager.
subject to tax. See above for details of taxation on savings and
Fund manager A fund manager is employed to invest money for (amongst other things) unit trusts and investment trusts.
investment income. Wherever you see a gross income figure quoted, it means that no tax has been deducted (e.g. as with an ISA investment).
Gross interest Interest paid to you before tax is taken off is ‘gross’ interest. If you are a non-taxpayer you can register to have the interest paid gross – ask the bank or
Net interest Savings accounts from banks and building societies pay interest after the tax is taken off. This is called ‘net’ interest.
building society for Form R85. Hedging A strategy used to offset investment risk. Usually makes use of futures or options.
32
33
Distribution The payments of any investment income generated by a fund, usually
Independent Financial Adviser (IFA) A qualified professional authorised to advise on
made either half-yearly or quarterly. You can choose to have each distribution paid to
savings, investment and pension products. It is usually best to seek advice from an
you or to reinvest it in the fund for greater capital growth.
adviser who is not tied to just one company but can recommend from the full range of
Dividend The income received on a share which will normally be based on the profits of the business. Some investments may have a fixed dividend. Earnings per share The return on equity investments. Any figure quoted represents
products available. Investment income The portion of a company’s or an individual’s income which is derived from its investments, including interest and dividends on stocks and bonds.
the total amount of a company’s earnings (after deductions) divided by the number of
Investment fund A fund set up by financial institutions to invest in certain types of
ordinary shares it has issued.
businesses, perhaps by location of the business or type of industry. Instead of buying shares in the businesses directly investors buy a share in the fund. They receive income
Equity
•
A shareholding in a limited company. By extension, ‘equities’ is generally used to mean the whole range of shares traded on a Stock Exchange
•
on the performance of the whole fund and can buy and sell depending of the value of the whole fund.
The amount by which the value of a house exceeds the total of the loans secured by
Managed fund An investment fund, often a Unit Trust, OEIC or
mortgage(s) thereon
ISA, where the stocks and shares that the fund invests in are
Ethical investments Shares or similar investments (for example, holdings in unit trusts) in companies who have committed to conform to a particular set of moral or
managed by a professional investment manager. The fund will be managed to achieve certain goals and targets which will be clearly
ethical principles.
highlighted; for example, as much Financial Services Authority (FSA) The FSA currently regulates most financial services markets, exchanges and firms in the UK and, together with HM Treasury and the Bank of England, they assist in supporting the overall financial stability of the economy. However, the Bank of England is expected to assume control of the FSA’s
income as possible. Maturity date The date on which a payment becomes due at the end of the term of an endowment policy or a fixed term bond or loan.
regulatory functions in the near future. FT-SE There are various indices based on companies quoted in the Financial Times. The purpose of these is to provide a benchmark of the performance of the stock market
Maturity value The amount payable to the insured at the maturity date of an endowment policy.
as a whole. This benchmark is often used to measure the effectiveness of a fund
Net income Income gained through savings or investments are
manager.
subject to tax. See above for details of taxation on savings and
Fund manager A fund manager is employed to invest money for (amongst other things) unit trusts and investment trusts.
investment income. Wherever you see a gross income figure quoted, it means that no tax has been deducted (e.g. as with an ISA investment).
Gross interest Interest paid to you before tax is taken off is ‘gross’ interest. If you are a non-taxpayer you can register to have the interest paid gross – ask the bank or
Net interest Savings accounts from banks and building societies pay interest after the tax is taken off. This is called ‘net’ interest.
building society for Form R85. Hedging A strategy used to offset investment risk. Usually makes use of futures or options.
32
33
Notice period You have to notify the bank or building society a set number of days
Unit Trust A fund set up by financial institutions to invest in certain types of businesses,
before you make a withdrawal – 30, 60 or 90 days are common notice periods. You can
perhaps by location of the business or type of industry. Instead of buying shares, the
usually get your money out earlier, but if you do, you lose 30, 60 or 90 days’ interest,
investor buys a unit in the fund. They receive income on the performance of the whole
depending on the notice period.
fund and can buy and sell, depending on the value of the whole fund.
OEIC Open Ended Investment Company – very similar to an investment fund.
Variable interest Most current accounts pay variable interest, which means the
Pooled investment fund A vehicle for bringing together the investments of many people or organisations and using the combined funds to obtain economies of scale and investment management skills – which would only be available to individuals at
interest rate goes up or down. From time to time you should check whether you could get a higher interest rate from a different account and, if so, be prepared to switch. All quality newspapers have such tables featured regularly in the personal finance or business sections.
significantly higher cost. Sharesave A Sharesave scheme (Savings Related Share Option Scheme), was first introduced by the government in 1980. It is a tax advantageous savings scheme combined with a share option designed to encourage employees to take a direct stake
Yield The amount of income an investment delivers after deduction of charges (but not tax) expressed as a percentage of the amount invested. Usually expressed as an annual figure – e.g. “the fund’s estimated gross yield is 5.9% p.a.”
in their company enabling them to participate in its future. Stocks and shares Usually the same, these are investments directly into a business,
ABCUL
literally a share of the business. You can often buy and sell them quite easily, particularly
The Association of British Credit Unions Limited (ABCUL)
if they are listed on a stock market. There are two ways of earning an income, price
is the main trade association for Credit Unions in Britain.
accumulation and dividends. The aim is for the value of your shares to grow over time
They provide information and resources and can help you
as the value of the company increases in line with its profitability and growth.
find your nearest Credit Union.
Stocks and shares ISA An investment fund, OIEC or unit trust which complies with
0161 832 3694
government rules allowing income from the investment to be paid tax free. The
www.abcul.org
maximum annual contribution is £10,200 (see also Cash ISA within the savings section
Useful organisations
AIFA
on page 17).
The Association of Independent
Stock market/exchange A place, virtual or actual, where people buy and sell stocks
Financial Advisers (AIFA) is the
and shares. Businesses must meet certain rules as to size etc. to have their shares
voice of the independent financial
traded in such a market The London Stock Exchange is the main stock exchange in the
advisers profession and can help you find an independent adviser
United Kingdom.
in your area.
Term The period of time for which a policy or bond is issued.
020 7628 1287
Term account Term accounts last for a set period – two years, say. You may not be able to get your money out early.
www.aifa.net Consumer Credit Counselling Service (CCCS)
Tracker Fund An investment fund which tracks a particular reference such as a Stock
As the leading debt-counselling charity, CCCS provides free,
Market index like the FTSE100 or a published rate such as the Bank of England Base
independent and confidential advice on debt issues.
Rate.
0800 138 1111 (freephone) www.cccs.co.uk 34
35
Notice period You have to notify the bank or building society a set number of days
Unit Trust A fund set up by financial institutions to invest in certain types of businesses,
before you make a withdrawal – 30, 60 or 90 days are common notice periods. You can
perhaps by location of the business or type of industry. Instead of buying shares, the
usually get your money out earlier, but if you do, you lose 30, 60 or 90 days’ interest,
investor buys a unit in the fund. They receive income on the performance of the whole
depending on the notice period.
fund and can buy and sell, depending on the value of the whole fund.
OEIC Open Ended Investment Company – very similar to an investment fund.
Variable interest Most current accounts pay variable interest, which means the
Pooled investment fund A vehicle for bringing together the investments of many people or organisations and using the combined funds to obtain economies of scale and investment management skills – which would only be available to individuals at
interest rate goes up or down. From time to time you should check whether you could get a higher interest rate from a different account and, if so, be prepared to switch. All quality newspapers have such tables featured regularly in the personal finance or business sections.
significantly higher cost. Sharesave A Sharesave scheme (Savings Related Share Option Scheme), was first introduced by the government in 1980. It is a tax advantageous savings scheme combined with a share option designed to encourage employees to take a direct stake
Yield The amount of income an investment delivers after deduction of charges (but not tax) expressed as a percentage of the amount invested. Usually expressed as an annual figure – e.g. “the fund’s estimated gross yield is 5.9% p.a.”
in their company enabling them to participate in its future. Stocks and shares Usually the same, these are investments directly into a business,
ABCUL
literally a share of the business. You can often buy and sell them quite easily, particularly
The Association of British Credit Unions Limited (ABCUL)
if they are listed on a stock market. There are two ways of earning an income, price
is the main trade association for Credit Unions in Britain.
accumulation and dividends. The aim is for the value of your shares to grow over time
They provide information and resources and can help you
as the value of the company increases in line with its profitability and growth.
find your nearest Credit Union.
Stocks and shares ISA An investment fund, OIEC or unit trust which complies with
0161 832 3694
government rules allowing income from the investment to be paid tax free. The
www.abcul.org
maximum annual contribution is £10,200 (see also Cash ISA within the savings section
Useful organisations
AIFA
on page 17).
The Association of Independent
Stock market/exchange A place, virtual or actual, where people buy and sell stocks
Financial Advisers (AIFA) is the
and shares. Businesses must meet certain rules as to size etc. to have their shares
voice of the independent financial
traded in such a market The London Stock Exchange is the main stock exchange in the
advisers profession and can help you find an independent adviser
United Kingdom.
in your area.
Term The period of time for which a policy or bond is issued.
020 7628 1287
Term account Term accounts last for a set period – two years, say. You may not be able to get your money out early.
www.aifa.net Consumer Credit Counselling Service (CCCS)
Tracker Fund An investment fund which tracks a particular reference such as a Stock
As the leading debt-counselling charity, CCCS provides free,
Market index like the FTSE100 or a published rate such as the Bank of England Base
independent and confidential advice on debt issues.
Rate.
0800 138 1111 (freephone) www.cccs.co.uk 34
35
Notes
CFEB The Consumer Financial Education Body is an independent body that provides free, impartial information, education and guidance to consumers through their dedicated website www.moneymadeclear.org.uk Credit Action We are the national money education charity promoting better thinking about money. We have a range of useful publications, Moneymanuals and budgeting tools to help people achieve this. 0207 380 3390 www.creditaction.org.uk Directgov Directgov is the website of the UK government for its citizens, providing information and online services for the public all in one place. www.direct.gov.uk Money Saving Expert For up to date information on ways you can save money and to compare savings accounts. www.moneysavingexpert.com PADA The Personal Accounts Delivery Authority (PADA) is the authority set up to deliver ‘Personal Accounts’ throughout the UK and help people save for retirement. www.padeliveryauthority.org.uk
We at Credit Action are always seeking to improve our service to you. If you have any comments about this booklet (good or bad!) we would love to hear from you. Please email office@creditaction.org.uk or call 0207 380 33 90 with your feedback.
36
37
Notes
CFEB The Consumer Financial Education Body is an independent body that provides free, impartial information, education and guidance to consumers through their dedicated website www.moneymadeclear.org.uk Credit Action We are the national money education charity promoting better thinking about money. We have a range of useful publications, Moneymanuals and budgeting tools to help people achieve this. 0207 380 3390 www.creditaction.org.uk Directgov Directgov is the website of the UK government for its citizens, providing information and online services for the public all in one place. www.direct.gov.uk Money Saving Expert For up to date information on ways you can save money and to compare savings accounts. www.moneysavingexpert.com PADA The Personal Accounts Delivery Authority (PADA) is the authority set up to deliver ‘Personal Accounts’ throughout the UK and help people save for retirement. www.padeliveryauthority.org.uk
We at Credit Action are always seeking to improve our service to you. If you have any comments about this booklet (good or bad!) we would love to hear from you. Please email office@creditaction.org.uk or call 0207 380 33 90 with your feedback.
36
37
It has become increasingly evident over recent years that difficult situations in life can crop up at any time. Whether it is redundancy, sickness or the need for a new household appliance, having some money saved up can help tackle these situations head-on and thus avoid the pain of debt and financial difficulties.
Moneymanual
As a result, it is crucially important that you start saving to avoid financial worries now and in the future. Savings and Investments is a practical and easy-to-follow manual that offers clear advice and guidance on a range of issues to do with saving and investments, including:
• • • • •
How do I start saving? When should I save? What saving options are there? What is the difference between investments and savings? How do pensions work?
If you find yourself dependent on expensive credit to fund your lifestyle then this booklet can help you. Included is a pull-out budget sheet that you can use and re-use to help you get your finances back on track and start saving. So, start saving now and you can say goodbye to money stress, and say hello to a brighter financial future! “With savings behind them, people can cope far better with the events that life throws at them. This welcome guide does a great job of encouraging people to start saving and guiding them through the maze of different savings and investment options.” Mark Lyonette Chief Executive, Association of British Credit Unions Ltd (ABCUL)
Production of this booklet sponsored by
Lynton House, 7-12 Tavistock Square, London WC1H 9LT Tel: 0207 380 3390 office@creditaction.org.uk www.creditaction.org.uk www.moneybasics.co.uk Registered Charity No.1106941
Includes pull-out budget sheet
for savings & investments