Once you're out of debt, you can start planning for your future wealth. If you're comfortable with living within your means and savvy shopping, you might find yourself with money left over each month. This means you're in an ideal position to start saving a regular sum towards your future. There's two timetables here – the short and the long term. Short term means putting away money for a rainy day, a new boiler or holiday, and long term saving includes things like pensions.
Let's talk about savings first. After you've paid your bills and taken out your really necessary spending money, pay yourself! Put some money away in a separate bank account to build up for something special. Canny savers often have several savings accounts dedicated to certain goals, such as a new car or a Christmas account.
Even if you can't think of a direct reason for why you should save, the habit of regular saving is worth it because, as the interest piles up, you might surprise yourself by how quickly it grows! Money doesn't buy you everything – but it certainly helps to have a little cushioning. Having a safety net of savings is also really handy if you suddenly can't earn for a few months, maybe due to redundancy or sickness. Think of it as personal insurance.
It's important to choose the right savings account so you can earn more interest on your savings. This time, you're looking for a big number. An account that has an annual equivalent rate (AER) of 5% means that if you leave £1,000 in it, untouched for a year, it'll earn £50 interest a year. Not bad! So this is better than one that pays you only 3%, because then your money would only increase by £30.
You also need to think about what kind of access you'll need to your savings, and how you usually deal with the bank. Do you prefer to transfer money around through online banking, or by going into a branch? For both, there are some 'easy-access' ones where you can dip in if you need to without having to give the bank a warning 'notice' period first, but the interest rates will be a little lower.
There are also accounts that need a bit more commitment – but they reward you with a higher interest rate. These accounts can be:
Fixed rate savings bonds are a bit more complex because you put in a lump sum for a fixed amount of time, but you can't withdraw money again until the end of that period. You do get a fixed interest rate (not tracked against the Bank of England's rates), but that can be good or bad - because you might get stuck with a rate that's not competitive if the Bank of England puts interest rates up.
The other option is a cash ISA, which stands for Individual Savings Account. There's a limit on how much you can pay into one in each tax year (which runs from 6 April in one year to 5 April the next). Cash ISA limit is currently £5,640 (as of April 2012). The ISA limits change each tax year. You can find out what the current ones are at www.moneyadviceservice.org.uk, but you don't pay tax (which is 20%) on the interest you earn. That means if you put £5,000 into an ISA with a 1% AER, you'll earn £50 interest a year. If that £5,000 was invested in a normal savings account, the interest would be taxed at 20%, so you'd earn only £40 a year (£50 interest ÷ 100 = 50p = 1%, then 50p × 20 = £10 = 20% tax. So £50 interest minus £10 tax = £40 interest).
What about the rest of your life? We all worry about old age. But no matter how old you are, it's never too early or too late to invest in your future. Although the age at which you'll receive the state pension is increasing, you can do more to ensure a rich retirement. If you're in work, a company pension scheme is definitely worth joining, as your employer will sometimes also top your pension up. If you're not employed, or self-employed, a private stakeholder pension could be for you.
It’s never too early or late to plan for a richer life. If you’re still unsure about getting on top of your finances, you’re not alone. Our next section can show you how to get further advice >>
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