Lighthouse : How to make your savings work harder

Whatever you are saving for - the deposit on your first home, your wedding or to help your children through university - it is important to put your money in a plan that gives it the potential to grow.

It's all very well putting money aside, but where precisely are you going to put it? A standard deposit account may seem like the safe option, but with interest rates at all-time lows, your money will grow painfully slowly and could end up being worth less in real terms once you take inflation into account. Here we explain how you can make your savings work harder for you.

The whole point of saving money is to make it work hard, so that even a small amount each month has the chance to grow into a sizeable amount over time, so you can make your dream come true.

With money on standard cash accounts still lower than inflation, unless you take action your savings will end up shrinking in real terms. Assuming this trend continues, you will be able to buy less with your savings in, say, seven years' time than you can now.

Giving your savings the potential to grow

Putting your savings into stock market investments is more likely to be a sensible choice if you are saving for the longer term, for instance five or more years, and gives you the potential for capital growth and income or interest. However, unless you have plenty of spare time and the detailed knowledge required to research appropriate investments, you should ask a professional financial adviser to recommend suitable funds.

Reducing risk

Stock market investments are inherently risky - the value of stocks, shares and funds can go down as well as up - but there are ways of reducing risk.

One is by not buying individual stocks, shares, bonds or other types of investments directly. Most people put their money into one or more investment funds that then invest the pool of investors' money across a broad range of types of investments. This ensures that you do not have all your eggs in one basket.

Another is by choosing investment funds that are managed in a way that suits your attitude to risk. Some people are more willing or can afford to take more risk than others. Your financial adviser will help you work out your risk profile and can then recommend investment funds that match it. Your risk profile may change with your age and circumstances. Your financial adviser will review it with you regularly.

How much might you have missed out on?

if you had stashed away £50,000 in a savings account earning the UK base rate in 2009 today you would have £52,510. With inflation higher than the base rate for most of that time, you would have become poorer in real terms.

If instead you had put your £50,000 in UK equities, you would now have something in the region of £133,553.

Give your savings the potential to grow

You may decide that the market looks too risky to invest. But in a world where inflation is higher than savings rates, taking no risk is risky too. The best thing to do is to consult a professional financial adviser who can recommend funds that match your attitude to risk while giving your money the potential to work harder for you.

The value of your investments, and the income you receive from them, can go down as well as up and you may get back less than you put in.

Source: FE Analytics 27 August 2019.