Best methods for a young professional to save and invest for the future?

eroded

Hi All - long-time lurker, first-time poster!

I've recently graduated from University and have found myself in my first job. Thankfully it's reasonably well-paid, and so, having been used to living off a much lower income as a student (just over £1k/month), it seems a shame to 'waste' my newly found wealth by frittering it away and spending it.

So, how best to save for the future? My initial idea is to start throwing £1000/month into a cash ISA. This seems a good amount to save, while still leaving me with a comfortable standard of living. However, as even the best paying ISAs seems to give interest rate lower than inflation, I'm effectively 'losing' money. What are the other alternatives to saving in an ISA?

My company does not provide any pension provision. Is it worth me setting up a personal pension myself, or are other saving methods (ISAs, etc) the way to go? I am not in the 40% income tax band, so would only gain the 20% tax relief.

atush

Yes, I would suggest a pension. A personal pension or stakeholder depending ont he level of contribs and the fund choice you wish to have.

Second, ISAs. Your saving of 1000/month will soon fill your annual limit, so save the rest into an easy acess acct, looking towards the day that NSI open a new series of ILSCs which pay inflation+ and you could transfer the money in then. This would protect you against the dreaded inflation. After you have 6 months salary in Cash, and have started your pension, think about saving further monies (after you fill next years Cash Isa) into a S&S isa or an investment trust savings plan. You could also have a seperate regular saver acct for fun things such as holidays etc that would mean you wouldn't have to dip into your Cash isas as money can be put back in after you have filled them with this years allowance.

BLB53

However, as even the best paying ISAs seems to give interest rate lower than inflation, I'm effectively 'losing' money.

As you have already sussed, long term, cash is not the answer.

The best way to produce a real return is via equities, either individual shares or investment trusts.

Pensions have the advantage that you get the tax breaks on the way in but the income at the end is taxable. Also, once committed, the money is inaccesible for many years. If you want to minimise charges, you can open a sipp with a low cost provider like sippdeal and purchase the shares/ITs within the sipp yourself - this has become very popular in recent years as more people can access info on the internet.

With ISAs, they are very flexible and you can access the money at any time. Also the interest or income from shares is tax free so can be used as a sort of long term pension option. Again a low cost stocks and shares ISA with a low cost provider like Interactive Investor would be best.

Obviously if you can afford it to go for both.

BLB

infj

I agree with atush. If you haven't read the pages on MSE about budgeting and saving then read those first. Then - do a budget. You will then know how much you actually have available to save. Then you need 3-6 months salary in cash easily accessible in case you lose the good job. Then you can fill up your cash ISA limit and think about having enough to put in to the next financial tax year as soon as it starts. I am lucky enough to have a salaried pension so I am not up on that but yes you need to start saving for one BUT do your research - like shares many pensions are just ways to make financial advisors rich rather than yourself. If you then find you do have enough spare to think about investing and shares, then again do some reading and research around it - particularly about low cost index trackers. The motley fool site and book is good source for this or the monevator blog or book by Tim Hale called Smarter Investing (borrow from library).

I wish I'd known all this stuff when I was in my 20s!

Good luck.