What to do with that
It could be a pay packet bonus; or the benefits of low mortgage rates; or you're richer because the children have grown up. There's 101 reasons why you have some spare cash and at least 102 ways to save or invest it.
So what's your best course? If “best” means “most”, you have almost as much chance of finding the ultimate winning investment as you have of beating Usain Bolt over 100 metres.
Instead, forget “best” and go for “least bad”. If you aim for a return that is just above average and succeed, then you will have beaten many finance professionals – for every top fund manager you read about there are dozens who are distinctly dull. And stars burn out.
Start with a strategy that suits your and your family's financial goals - rather than look at “products” and then shoehorn your cash into them.
Here's four questions to help determine what you do with spare money.
What return do I expect from my savings?
This could range from keeping your cash in a safe via protecting your money against inflation to making big gains.
Banks and building societies provide security. But not much else. Savers don't need to be reminded that interest rates on instant access accounts are so low as to be virtually invisible. So they're best for money you intend spending.
Everyone needs an emergency fund. I've just spent thousands on roof repairs I hadn't expected
but I'll feel better on the
next rainy day.
Inflation measure the retail prices index stands at 3.4%. Basic rate taxpayers need nearly five per cent interest for on savings to hold off rising prices while higher rate taxpayers need nearly 6.5 per cent. Few accounts pay over 4 per cent. To get more, you'll have to abandon the security blanket.
Can I afford to take risks?
Put bluntly, will you sleep at night if your investment could fall in value? Or are you prepared for ups and downs? If it's the former, you'll have to stay with a bank account. Happy with the latter? Then embrace stocks and shares.
If you want greater reward, you have to take greater risks – except with Premium Bonds which guarantee your money while offering big prizes. I've had £38 in Premium Bonds for over 40 years – and I've never won a penny.
What's my time horizon?
Everyone needs an emergency fund. I've just spent thousands on roof repairs I hadn't expected but I'll feel better on the next rainy day.
Longer term widens options. Consider fixed term, fixed rate savings accounts – they tend to pay better. Check a comparison website to find a best buy.
And, if you can sleep at night (see above!), there are thousands of stock market linked funds. If you want suggestions, try “execution only IFAs” into a search engine. Or visit an IFA for individual advice. Shares and bonds are long term purchases.
Can I save tax free?
The simplest way is the Isa (Individual Savings Account). You pay no income tax on interest or dividends or any capital gains tax on profits made on shares.
You get an allowance for each tax year – the 2011-12 amount ends on midnight April 5. And it's use it or lose it – you can't carry it over. It makes sense to start saving and investing with an Isa.
For 2011-12, everyone over 18 can invest £10,680. Up to half (£5,340) can go into cash accounts – the balance into stocks and shares. The next tax year starts on April 6 when you can put £11,280 into an Isa – again up to half (£5,640) can go into cash.
Pensions offer tax advantages including tax relief up to the first £50,000 each year (providing you earn enough), investment in a tax-exempt fund and 25 per cent of your pension pot tax free on retirement. These rules could become less generous after the March 21 budget. Pensions are complex. Take independent advice.
Whatever you do, never let the tax-saving tail wag the investment dog.
This article was written by Tony Levene and any opinions are his independent view on the economy or political issues.
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