Funding your future lifestyle

financial future

Think about the level of risk you might be willing to take with your hard-earned cash

We all dream of a more prosperous financial future, but how do you turn this into a reality? With interest rates on savings accounts stuck at low levels, it’s difficult to get any real growth on your money over the long term.

If you plan to rely on your savings to one day provide you with an income or to fund your future lifestyle, you need to make sure you are building them up sufficiently. Saving and investing is about putting plans in place for your long-term goals whilst making sure you have enough money set aside to cover your day-to-day living expenses, one-off payments (like holidays) and any emergency costs (perhaps for your car, home or health).
There are many ways that you can save or invest, and while we all want our money to grow, it’s important to think about the level of risk you might be willing to take with your hard-earned cash. It’s about achieving a good balance.

Basic savings
You could decide to save a manageable amount each month from your take-home pay to cover your living costs, larger expenses and the unexpected.

A bank or building society account may be a good home for your money, or you could open up an easy access Cash ISA (Individual Savings Account).

Cash ISAs
A Cash ISA is a savings account that allows you to make regular contributions. Unlike a standard savings account, you won’t pay any tax on the interest earned within your Cash ISA.

The other main difference between a Cash ISA and a standard savings account is that there is a maximum amount you can pay each tax year into a Cash ISA. This is £20,000 for the 2017/18 tax year.

Stocks & Shares ISAs
A Stocks & Shares ISA differs from its cash equivalent by allowing you to invest in:

Shares in companies
Unit trusts and Open-Ended
Investment Companies
Corporate bonds
Government bonds

A fund is when investors pool their money together to buy a various range of assets such as bonds, shares and property. If you have a Stocks & Shares ISA, you can usually select different funds to invest in, plus move your money between these without taking it out of your ISA and losing the tax advantages.

Innovative Finance ISAs
The Innovative Finance ISA is peer-to-peer lending that allows individuals to lend cash directly to borrowers.
With an Innovative Finance ISA, you don’t pay tax on any income or capital gains from your investments.

ISA contributions
Each tax year, you can put money into one of each kind of ISA. You can save up to £20,000 in one type of account or split the allowance across two or three types.

For example:
You could save £12,000 in a Cash ISA, £5,000 in a Stocks & Shares ISA and £3,000 in an Innovative Finance ISA in one tax year.
Of course, the above is just an example. You could decide to choose different amounts depending on the level of risk you are comfortable with, as long as you do not exceed the maximum ISA allowance for the current tax year.
Finally, you can also start an ISA with a single lump sum and not contribute anything else. Alternatively, you can begin with the single lump sum and at the same time start a regular monthly investment.

Other investments
When you have enough easy access savings set aside, you may wish to consider investing your money over the longer term, say five to ten years or more, to help achieve your future goals.
Investing in other assets, such as stocks and shares, government and corporate bonds, or property gives you the potential to achieve better returns than money in the bank.
However, please remember that there is no guarantee as the value of any investment can go down as well as up, so you may not get back the amount you put in.

In addition to ISAs, you could also consider:
Corporate and government bonds – these are loans to the Government or private companies that pay you interest.
Investment bonds – these are products which invest your money with the aim of providing you with medium-to-long-term returns.
Open-Ended Investment Companies (OEICs) – your money is held in a pooled fund that is then invested in other funds and assets.
Property – you could invest in rental properties, commercial properties or holiday homes.
Shares – these are a direct investment in individual companies where you take a stake, and if it does well you may get a dividend (a share in the profits).

Balancing the risk
It’s often a good idea to put your money into different types of assets to help balance the risk. So if one doesn’t perform well, another may do better. Or you could choose a fund which does this kind of balancing for you, sometimes known as a ‘Managed Fund’. Different types of assets can have different risks that need to be taken into consideration when choosing an investment.

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