Best Way to Save for New Car

chris_debian

Hi, all..first post!

I'm looking towards planning to get my next (used) car. I will be in a position to start saving £200/ month and am aiming to save £8000. I was just going to put this in a Co-op savings account which I have available, but I then thought about the old days of Premium Bonds, which would be a low risk investment, with possible unexpected gains.

Obviously there are many ways to save the £8000 I'm aiming for, but I wondered what the thoughts would be of this learned audience.

Can anyone advise this newbie?

Many thanks for your anticipated reply.

Chris.

colsten

Have a look at TSB Plus and other interest paying current accounts. Very few people here would put their money into any savings account or premium bonds.

eskbanker

I'd agree with the points in the previous post and would also consider regular savings accounts (see link at top of page).

bowlhead99

The 'unexpected gains' of premium bonds are very remote. Just to give you an idea of what the 'expected' gains are:

Each £200 that you put in, gives you 200 'goes' at the draw. So your first £200 will, over the next 40 months, get you 8000 goes at it. However the chances of winning are 1 in 26000. So probably even with all those draw entries, you will win zero. The next £200 you invest will get you 7800 goes at it, and the next £200 after that will get you 7600 goes at it and so on.

So actually by the time you have £800 invested in premium bonds, and you hold them for 3 and a bit years until you're ready to get your car, your bond numbers will get run 30,000 times and the odds of winning are 1 in 26000.

So just from this £800, you are likely to win one prize. 98.5% of the prizes available are £25. So, the most likely thing to happen is that you 'win' one prize of £25 on your £800 invested for 3 and a bit years.

If the £800 was in a bank account earning 3% interest (and interest on interest) for three years, you would have earned £75. There would be a little bit of tax to pay but the headline figure is still 3 times the return of the premium bond - and some current accounts pay more than 3%.

Of course, you might win more than one prize from your first £800. And you're not just investing £800, you hope to have £8000 by the end. But most of these other bonds are bought much later and have fewer attempts at the draw. So you might win 4 or 5 or 6 prizes altogether. Sure, the prizes are only going to be as low as £25, 98.5% of the time. If you are only getting 5 or 6 prizes the chance of uncovering something better is very unlikely. Of course, there's a chance they might be better. In fact, for every prize you get, there's a one in two million chance that it will be a million quid. But basically, with only five goes, it won't be.

Headline rate of return on premium bonds, what they pay out in total, is 1.3% but this assumes you play it for enough times that you get all the prizes including the jackpot. You won't be doing that, so your return is probably lower, a percent or so. Of course it might be higher if you get lucky. But if you fancy a flutter, you could just go and earn a higher interest rate elsewhere and spend some of the extra income on the occasional lottery ticket.

As you only have a few years you probably can't afford to take the risk that your £8000 becomes £5000 just before you need it, so a stockmarket-based investment is out. So you're probably best to follow Colsten's advice.

One thing I would suggest though:

You are thinking of saving up to £8000, maybe that's what a suitable car costs these days. However in 3 years time, inflation will probably make them cost more. Probably your salary will be going up as well. So instead of putting away £200 a month every month for 40 months - put away 200 a month this year, then next year increase it to 210, then the year after increase it to 225. After the 40 months you'll then have 8520 instead of 8000 but it won't have felt noticeably more difficult!

chris_debian

Thank you so much, everyone. This has given me food for thought, and further research.

Apologies for my late reply.

Chris.