Once you have set your savings goals and are happily saving, the next question you need to answer is are your savings working for you?
One of the default ways I like to save money is by using a savings account. There are many options for savings accounts that are available. Most of which are offered by banks. I generally find that accounts where you can easily access the money tend to have lower rates than accounts that are fixed i.e. were you cannot withdraw the money for a certain period of time. Individual Savings Accounts are also a great option because the interest paid on these accounts is tax free up to a certain amount. It is always important to understand macroeconomic variances that affect the value of your money and the return you receive from the bank.
In the UK you may also get up to £1,000 of interest, tax-free depending on which Income Tax band you’re in. This is your Personal Savings Allowance.
|Income Tax band||Tax-free savings income|
What is inflation and how does it affect your savings
Inflation is the decrease in the value of money and the increase in prices of goods.For example, today you can use £1 to buy a pint of milk, but if inflation goes up you may need more than £1 to buy the same pint of milk in the future. If you are saving money for long periods of time it is important to ensure that the return being received is at least higher than the rate of inflation. Unfortunately, due to the current economic environment, interest rates are very low which means returns from traditional savings accounts are lower than the inflation rate.
What are your saving goals?
You need to know what you are saving for and the length of time you are planning to save for. This will determine the strategy you will employ in order to maintain the value of your money.For short term saving periods, savings accounts are ideal however, if saving for long periods of time you may need to consider investments options.
Investment strategies are determined by a number of factors including how much risk you are willing to take, how quickly you can gain access to the money, the return that you will receive and how easy it is to invest. Some investment options include buying shares in companies, investing in bonds, properties, peer to peer lending etc. The strategy you decide to use has to answer the following questions;
- Is the rate of return higher than the rate of inflation?
- Are you looking at short term or long-term investments?
- Are you aware of how long it will take to access the money when it’s needed?
- Are you aware of the risk involved and how you will deal with it?
- Are you aware of the fees involved with investing into the product?
It is important to know what you are investing in and how it works. For example, if you decide to buy shares in a company, speculation will only get you so far. It is important to know what type of industry the company trades in and be able to understand the financials. Always seek professional advice when looking at different investment options.
Investing is a good way of increasing your passive incomethus increasing your income streams.
In future blogs I will be going into more details of the strategy I use and how it has worked.