Where to start - Distributed Saving & Investments

neustift

Hello all...

First. Im relativly new here on MSE.

I am really looking forward to 2010 because by mid (hopefully earlier) 2010 I will no longer be a slave to debt I am therefore looking to start saving and investing. If I am really disciplined I will have 1k month to invest / save

Background. Stupid with my money for quite a while in my early twenties. A few defaults which again clear in 2010. I am now 30 and realise that I need to get myself sorted for the future including pension.

With whatever I do I read up / ask around and then often do it myself. I am here therefore to get peoples ideas on how best to have a distributed saving / investment scheme setup.

I work in IT so prefer online if possible or at least to keep track / analysis of my investments. I am open to various ideas to spread risk and to ensure i dont have all my eggs in one basket.

Im in it for the long term but also looking to smaller shorter term returns also.

Initial thoughts are isas, Zopa.com and Unit Trust Funds.

I would appreciate any feedback / experience / suggestions people may have.

Thank you for your time.

Cheers

Lokolo

You really want to decide what your goals are. Otherwise you end up not being motivated at all and slacking!

How much savings do you want to have?

You must also think about mortgage and your pension.

ISAs you can have a Cash ISA and an Investment ISA, at the moment £3,600 in Cash and £7,200 (minus anything in Cash ISA) in Investment ISA, if you are under 50 (which I assume you are).

Also investments are longterm, theres usually a bumpy round so keeping money in for longterm means these bumps get a lot less bumpy and you could end up with a nice profit (unless you decide to take out all of your money in a very bad year!!)

johncolescarr

The first thing you should aim to do is to save 3-6 months of your income in an instant access account. This is the most important step as this will give you the security you need if your circumstances change and you need the money in a hurry.

After this, its really about your goals (ie when you will need money and how much) and your appetite to risk.

I set my financial goals in 3 categories:

less than 5 years: these goals I save for in 100% secure vehicles (ie cash savings)

5 to 10 years: "lower risk" investments

10 to 20 years +: "higher risk" investments

This is a really crude rule of thumb and very subjective, in order to gauge your attitude to risk there is a useful tool on the halfax website.

There is no substitute to reading around to decide what investment options are best for you and that you are comfortable with.

I like the fool website for their guides

Good luck and I wish you the best of sucess in clearing your debt, reducing and eliminating your debts early is also a sort of way of saving as you are dramatically reducing your interest repayments, plus it has guaranteed returns

Look at the benefit of overpaying your mortgage (assuming you have one) as overpaying (assuming there are no penalties) can often give better "effective" returns than saving There is a calculator on the website that shows you if you profit from overpaying.

Also, if your company offers some kind of stakeholder pension (assuming it doesnt offer a final salary pension) and it will pay some contirbutions on your behalf it is worth getting this as its besically free money. If your company doesnt offer anything like this or you are self employed, it is worth looking at the tax benefits of pensions but I dont know a lot about this so I will leave to someone else to comment on

jamesd

ISAs and unit trusts/OEICs outside an ISA are likely to do best.

Now is a good time to be experimenting with lending at Zopa because the new year is a time when borrowing demand is high. Last year a flood of new lenders put money in because of the reducing bank interest rates. This year bank rates are increasing so the first few months of the year might be a good time to lend. Or not. No way to know yet. But now is also a good time for the equity markets, so it's not an easy choice.

Take care with the Zopa lending screens. They assume that you're a 0% tax payer when they give you a return after fee and bad debt allowance. As you can see from the numbers above, that's way off if you're a higher rate tax payer. For the common A 36 month market Zopa would tell you that for a 7.40% interest rate the expected return is 5.40% when it's really 5.15% for basic rate and 4.73% for higher rate, all before tax.

For comparison purposes, here are the average rates lenders achieved in the week ending 7 December 2009. Rates are before tax, after allowing for the effect of bad debt allowances, so you can compare them to the gross rates of savings accounts. Bad debt is deducted after tax, so its effect is greater at higher tax rates, which is why I have to give rates for different tax levels.

20% tax, gross savings equivalent
A* 36 5.28
A 36 5.15
B 36 5
C 36 3
Y 36 3.98
A* 60 6.8
A 60 7.2
B 60 7.1
C 60 6.45
Y 60 6.08

40% tax, gross savings equivalent
A* 36 5.07
A 36 4.73
B 36 4.17
C 36 0.83
Y 36 2.43
A* 60 6.63
A 60 6.87
B 60 6.43
C 60 4.7
Y 60 4.87

Raw rate, before 1% fee and bad debt allowance
A* 36 6.9
A 36 7.4
B 36 8.5
C 36 10.5
Y 36 9.6
A* 60 8.3
A 60 9.2
B 60 10.1
C 60 12.7
Y 60 10.7

Do note that these are averages. It's possible to do better than average and I hope that higher rate tax payers weren't lending at the average rates. Like banks and building societies, at Zopa there are people who continue to accept lower rates than necessary instead of switching to the best rates that they could get. Don't be one of them and don't even think of lending at average rates. You can do better and part of learning to use Zopa is learning how far above the average rates you can go and still get your money lent out at the speed you want. The lower the speed, the higher the rates you can get. You can also make more if you pick and choose when to lend and only do it when rates are high, instead of dropping yours to try to compete when there's low demand.

Declaration of interest: I've both an outstanding loan with many lenders via Zopa and have lent a greater amount than that to others via Zopa. I also currently have a few thousand Pounds on offer at Zopa, mainly in case rates become sufficiently positive to interest me.

elbe

see this post for the correct figures for Zopa lending

jamesd

Elbe, I've updated the rates. I accidentally used as the bad debt rates values from another spreadsheet that had a half percent lender fee included.

The remaining disagreement is that Zopa's weekly spreadsheet has for the individual lenders a "gross lending rate (after fee)" and for the markets a "gross lending rate" without an after fee notice. Alexp2000 assumes that the market rates also have the fee deducted. I don't, in part because the fee varies, with some lenders being charged 0%, others 0.5% and new lenders 1%, and simply because Zopa doesn't say it's after fee, as it does for the individual numbers. Zopa's CEO has just written that he thinks that they are after deducting some weighted average so I'll update again once that's been clarified.

Declaration of interest: I've both an outstanding loan with many lenders via Zopa and have lent a greater amount than that to others via Zopa. I also currently have a few thousand Pounds on offer at Zopa, mainly in case rates become sufficiently positive to interest me.

elbe

Elbe, I've updated the rates. I accidentally used as the bad debt rates values from another spreadsheet that had a half percent lender fee included.

Thanks Jamesd

Primrose

Assuming that you're a taxpayer and that job security virtually anywhere is uncertain at the moment, it might be sensible to make your first objective to save between three and six months domestic expenditures in the highest paying easy access account you can find (and pray that it isn't necessary to call on it). Using up your annual ISA allowance is also a wise thing to do, and once your emergency money is safely tucked away, you may feel you can split your monthly savings between cash deposits and equity ISAs, although any money you invest in equities should be invested for at least five years. You may also want to increase your pension contributions as 30 is a little late to be starting to contribute.

Hargreaves Lansdown (h-l.co.uk) have a very useful Funds research section on their website. There are so many investment options that you probably need to do some research before you decide in which sectors to invest, but whatever your choices, spread your money around between different funds and different geographical sectors.

neustift

Just wanted to say thanks to people who have responded.. I obviously need to research a bit but a mix of 3-6 months safety net, isa, Zopa and funds seem the way forward for me just now anyway.. Thanks again

Looking forward to 2010 !