Deciding whether to invest or save your hard-earned money is always tricky. Investing is generally considered to be a riskier option, while building up a savings account is safer but with smaller returns.
With interest rates low and predicted to stay that way, returns on traditional savings accounts are poor, though you can use sites such as Moneysupermarket.com to find the most competitive deals. So as the global economy continues to struggle, what should you do?
In some ways, things haven’t changed. What you decide to do with your money will probably still be driven by how risk averse you are, how long you are prepared to wait for a return and how much access you need to your cash. The economic climate has changed, however and you need to consider carefully what choices to make.
Invest for the Long Term
Few of us have the confidence or the knowledge to take big risks with our money. In these times of economic uncertainty, investing in products that involve stocks and shares can seem an unwise option. However, there is also an argument that putting money in now, while prices may be at their lowest levels, could reap greater benefits further down the line when the economy improves and prices and dividends rise.
Of course, no one can predict when that will be or how great any future recovery might be, so if you are planning to invest then it has to be for the long term – as much as five to ten years. The days of earning a quick profit are, for now at least, well and truly over.
The Security of Saving Versus Smaller Gains
Savings accounts may offer security but savers have been hit by low rates of interest on their accounts. With the Bank of England base rate at 0.5%, where it has been since March 2009, the banks and building societies have been offering only small returns on their savings accounts. In addition, inflation was at 2.60% in July 2012.
With the base rate expected to remain low and then rise only slowly, putting cash into a savings account is unlikely to earn you above-inflation returns, especially if you are paying tax at 20% or 40% on the interest.
If you are not a tax payer then you can apply to not have the tax taken off your account. However, everyone has an annual cash ISA limit of £5640, which allows you to save without paying tax on the interest earned. Fixed-term products tend to offer the most competitive returns, but you will need to be able to lock away the cash for the entire period or face withdrawal penalties. There is also the risk that if rates start to increase rapidly you could lose out.
If you get an easy-access account with a good rate check if it includes a bonus. When the bonus is about to expire the rate will drop dramatically so start searching again and be prepared to switch your account to a better provider.
Saving with an ISA can be an effective way to build up a sizeable cash sum, free from tax. With compound interest – where the interest that has been added also begins to earn interest – you can accumulate some decent returns.
In short, if you are going to invest, be ready to stick it out for the long term. If you are saving cash use your ISA allowance and be active when it comes to managing your money by shopping around and switching to ensure you get the best rates.
Whatever you decide to do – and it may be a combination of both – do remember to also keep some cash available in an easy-access account for everyday needs and emergencies.