Savings and Investments Ground Zero

abunchofletters

Hey guys,

I'm looking for some rather general savings and investment advice, so here's a little scene-setting:

I'm 23 years old, in my first post-graduation job living at home with the parents [I'm looking to move out but not sure whether to buy or rent]. I have maxed out my Barclays tax beater cash ISA for this year, have the A&L current account and a Morgan Stanley cashback credit card [3% cashback was recently extended for another three months].

Any ideas on what I should do next?

I figure a proper Savings account would be prudent as the A&L high interest only applies to the first £2,500 in credit [note the account came with the PlusSaver savings account although I think that only pays 5.25% interest].

How good are the shares-based ISAs? Pensions? I don't know much about the latter except for my dad telling me wages paid into them don't get taxed. Would getting myself on the property ladder be a better financial idea? Stock market?

As I'm 23 I figure compound interest should be on my side. I'd like to retire early [or to put it another way, be able to choose how I spend my time based on what I like to do rather than for the job that pays more]. I'm a prudent person, always been good at managing my money but feel like I need some sort of plan to aim for...at least for now before I have all manner of bills to pay.

I suppose I'm looking for some 'I wish I knew what I know know' advice [without the singing]. All ideas are welcome.

Sapphire

I think there will be better qualified people than me responding with ideas for what to do with your money. However, I would say that investment in property (especially) and shares is not for me at the present time. I think the economy is currently on very shaky ground, particularly because of the amount of uncontrolled debt that people have been allowed to take out.

There could be a massive fall in the economy which it would take years to recover from. That's just a gut feeling - no one really knows what is going to happen, although there is much speculation.

I have money in the highest interest bonds I could find and a high-interest savings account (and cash ISAs, of course). My high-interest savings account is Sainsbury's. A couple of foreign banks also offer the highest rates, though those are not for me personally. Birmingham Midshires has an online saver paying 6.33% until mid-April 2008.

anniecave

I'm a little bit older than you, and looked at pensions a couple of years ago, but the returns didn't seem to me to be that good unless you were prepared to take risks. Personally I don't trust the stock market but I'm probably in a minority there.

There is a tax break on pension (the amount of income tax you've already paid gets added back in (at least at basic rate level, I can't recall how higher rate payers are treated) but when you do get your pension income it will be taxable.

The difference with an ISA is that that you don't get the initial tax break on ISAs but you do get future income tax free.

The general advice is that you should start saving for your retirement in whatever way as soon as possible of course!

If you are planning not to do anything big (like buy a property for example) in the next 12 months, there are some regular savings accounts paying good rates if you just want to keep your money safe but get a good return on what you do save.

caliston

It's worth pointing out The Miracle of Compound Interest.

Basically a few years added onto your savings/investment lifetime make a big difference in your total return. And a few points more on your return can amplify the return much more than you'd think (essentially compound interest is an exponential curve - the interest rate is the slope of the exponential).

This is why pensions etc work - you save a relatively small amount when you're young and given enough time you end up with a much bigger sum later on.

For example, let's say I invest £2000 today and wait 40 years. Let's assume inflation is on average 3%.

Inflation @ 3%: after 40 years I have £6524, but in today's money it's still £2000
Investment 1 @ 5%: after 40 years I have £14079, in today's money that would be £4316
Investment 2 @ 7%: £29948, in today's money £9181
Investment 3 @ 10%: £90518, in today's money £27749
Investment 4 @ 15%: £535727, in today's money £164232

To get the higher rates there's a risk/reward tradeoff: we can maybe get 5% with no risk by putting our money in the bank, but that means a relatively slow growth. To get higher rates usually involves taking some risk. The key is ironing out the bumps so that while you get an average growth of 10%, say, over the 40 years even if you might have a big drop in one year and a big gain in another. It also depends on what other demands you have for the money - this is why pensions are typically locked away so you can't raid them when you're short on beer money. By this I mean the concept of pensions generally, be they self-invested by you in property/shares/antiques/whatever or through some pensions manager. (Some of the things sold as pensions are actually quite poor)

It's also worth bearing in mind that a lot of volatility is short term. Stock market crashes happen occasionally but the market usually recovers. For example we've had several crashes since 1984 but the FTSE100 has gone up 6.5 times in that 23 year period. Similarly there was at least one house price crash but houses are still worth more than they were then.

Liz_the_Whizz

abunchofletters

Does your employer offer a pension scheme? If they do, then this is often the best place to start as employers will often make a contribution alongside the money deducted from your salary.

It's pretty painless and removes some of the layers of choice which can otherwise cause us to dither.

In the meantime, while you freeloading off your parents , you can get on with the serious business of saving money to buy a property in due course when the time is right.

If you've got some dosh to put away for a year, then now might be a good time for a fixed-term bond before interest rates on easy access savings start to drop in a few months, or so every seems to think.

Icesave are offering 6.7% for one year, also their easy access savings account pays 6.3% if you don't want to tie it up.

Good luck with it all!

Lazy_Runner

I would save until I had 3 - 6 months worth of salary/living expenses. This is incase things go pear shaped on the job front. This money should be held in a high interest instant access account.

After that, it would worth taking a few more risks. Depending on your financial goals, your view of the economy, there are a number of different products that will match your risk/reward level (according to the financial advisers on this site).

You could try premium /corporate bonds.

And/or you could try the stock market as part of collective investments like unit trusts, or you could invest in individual companies. It depends on how much you are willing to lose before you pull the investment.

If you are asking about what I had wish I had known when I was younger.

1) Don't get into debt. If I can't afford it, I can't have it. (Even houses and cars come to mind).
2) Pay myself first (lesson from the book Rich Dad, poor dad). Turned earned income into assets. Instead of turning it into trash.
3) Having a monthly contract for something is only useful if you are using the object/service. For many months I was paying a monthly contract for a mobile phone, but using less that 10% of the minutes. Now ditched that and got a PAYG.
3) The book Rich Dad, Poor Dad helped me see how to think financially straight. You may want to read the follow up books about cashflow quadrant and Rich Dad's guide to investing.