Saving Regularly Has Only Benefits
How would you like a cheque for £6000 ten years from now? Well, that’s a minimum that you could expect if you just saved £50 per month, every month. And that’s not including any interest that might be paid to you.
Saving regularly is a great way of building up a lump sum, either for emergency use or for that special purchase in years to come, perhaps even as a deposit for a home. If you have a lump sum to save, then by depositing into an interest bearing account straight away the whole sum begins to earn interest. But many people, particularly those just starting out at work, don’t have the luxury of having such a lump sum.
Without saving regularly, and building up a pot for emergencies, then any unforeseen expenses have to be catered for by borrowing money. This could come from a credit card, an overdraft facility, a bank loan, or even from friends or relatives. The first three options always cost more than the amount borrowed, and the last can cause embarrassment or aggravation going forward.
Saving regularly, and being disciplined about doing so means that you will always have an emergency fund for the unforeseen. You’ll be surprised how quickly you don’t even miss your regular savings, particularly if transfer funds from your current account to a savings account by a standing order.
Ways of Saving Regularly
There are several ways of saving regularly, including into different types of savings accounts such as instant access (ideal for emergency funds) and notice accounts.
But you could also save into company save as you earn (SAYE) schemes. These generally allow you the option to either buy shares in the company for which you work at the end of a savings term (usually three or five years) and at a pre agreed price, or take the cash including interest. One of the big advantages with SAYE schemes is that the money is deducted at source, meaning you don’t pay tax on it until you take the benefits, and then only if tax is liable. Of course, such saving is not designed to build up an emergency fund, as you can’t reap full benefits until the end of the term and the scheme matures.
For those savers who want to become investors, then drip feeding cash into a pooled investment product such as a unit trust, particularly if invested under a tax efficient Stocks and Shares ISA, not only helps build up a fund that gives potentially greater returns than a building society savings account, but also takes away the effects of daily market swings in share prices.
Investing a lump Sum v Investing Regularly
If you invest £10,000 into an investment trust at a price of £1 per share, and the shares rise to £1.10, you investment would be worth £11,000. However, if the share price falls to 90p, then the investment would only be worth £9,000. In other words, when investing a lump sum, you receive the full benefit of any rise, and take the full hit of any fall in the share price.
Now consider if you had invested only half of the lump sum. With the shares rising to £1.10, the value of your share-holding would be £5,500, and your gross investment pot would be valued at £10,500. If the shares had fallen to 90p, then the gross value of your funds would now be £9,500. By not investing the full amount in one hit, you have protected yourself from the full downside risk.
With the shares of the investment trust at 90p, if you now invest the balance of you funds, and the share price recovers to £1, your fund would be worth £10,555, as against £10,000 in the case of full investment at the outset. This is because the second tranche of £5,000 will have bought more shares at 90p than at £1.
Lump sum investing depends upon market timing, and takes experience to get it right.
Pound Cost Averaging
The method of drip feeding investment cash into the market, and therefore buying shares at different prices is called pound cost averaging.
If you are investing £100 per month into a unit trust, and in the first month the units are 100p, in the second month they are 80p, and the third month they are 90p, you would hold 336 units at an average price of 89.3p. The highs and lows of the share price movement will have been smoothed out, and you will buy more units at lower prices. When the recovery in the share price does arrive, your fund will grow more rapidly.
Start saving as soon as possible
Saving regularly builds discipline of financial habits, and will quickly build up an emergency fund. You can save tax free through Cash ISAs, and the cash will be available to you when you really need it. This in turn will save you interest payments on borrowings.
Over a short period of time, the memory of having the money to spend on a monthly basis quickly fades until you don’t even realise that you are saving. At Christmas you will be able to treat the children, without falling back on your flexible friend, the credit card. You’ll be able to pay your car insurance in a lump sum, and save money by doing so.
Soon you will have built up a lump sum, and be able to consider investing in regular stocks and shares investments (perhaps another ISA for tax efficiency?), and building up funds for your future.
Regular saving is the first method of saving or investing that any individual should consider. It could be the key that unlocks the door to future wealth and financial comfort.