When I first started saving money, I didn’t have a savings account or an ISA. I just had a second current account. I put all my non-spending money into this account every month and tried my best not to touch it.
The set-up was helpful – to an extent.
It divided my finances so that I could more easily keep to a budget, and it also meant that I didn’t have to worry about not having access to my cash in an emergency. I felt in control because I knew that I could always dip into those savings, which I couldn’t do if I locked the money up in a typical savings product.
Bear in mind, this was in about 2008. The products available to me as a new adult and student were pretty basic – and a far cry from the accessible, technologically savvy tools we have today. When I went into my bank to set up my student account with the free overdraft, this was really the height of innovation for someone at my life stage. After all, the first mobile banking app wouldn’t even be launched in the UK until 2011.
So there I am, saving away. Feeling good about myself because I’m tucking aside enough for a night out or two at a time.
Good for me, right?
Well yes and no.
Because the habit was good. The intention was good. And to be fair, that money I saved did help me get on the property ladder 15 years later.
But it also was literally just sitting there. Doing nothing. For years.
It wasn’t in an account that would benefit from interest rates (2009 happened after all) and it wasn’t growing in an investment account or helping prepare me for a financial future. Keeping my money in a bank account made me feel safe – but it wasn’t increasing my buying power. It wasn’t making me more money.
And it could have.
Here are five products that I could have used – and we all still can – to help us build our wealth, secure our futures, and ensure that we are secure and in control of our money
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The Savings Account
After the financial crash of 2008/9, interest rates plummeted on savings products – and they’ve dropped even further following the Covid-19 pandemic (although there are now some signs of improvement). Money Saving Expert has described returns on saving accounts as ‘pitiful’, following the Bank of England’s emergency base rate cuts earlier this year. However, there are still ways to make the most of interest rates on your savings across different types of accounts. The trick is to assess what you need most from a savings product.
After all, having a savings account is about more than just returns. They’re about creating a safe space for your money to accrue and from which you can make financial decisions.
For example, your savings account could be for money you want to ring-fence for a big purchase like a holiday or a new laptop or a piece of art you’ve been admiring. You may not want to put it away for a significant amount of time but you do want a space to save up without the risk (or temptation) to spend that cash.
Likewise, you could have a savings account for a rainy day or emergency fund. I have one of these which I contribute to every month for household expenses (like the new fridge or the broken boiler). Or it could be that you want to build up an amount of money to invest or put into an ISA, because some have minimum amounts you can open an account with.
Whatever your goal, a savings account or ring-fenced goal in your bank account, is an incredibly useful place to start and can set you up with positive money habits from which to build and grow your wealth.
Whether you’re thinking about investing or a better way to save, ISAs are a very interesting option. ISA stands for “Individual Savings Account” and anyone in the UK can benefit from them. They offer the freedom to save or invest without paying tax, plus, they’re pretty easy to understand, increasingly flexible, and require less maintenance than some other financial products. Plus they may help you beat inflation – no mean feat at the moment!
Of course, there is an allowance on ISAs. Each tax year, the amount you’re allowed to put into an ISA is capped – for example, in the 2020/21 tax year, the overall ISA allowance is £20,000. But it doesn’t include what you’ve already put in – so if you entered the tax year with £12,000, you could still add a further £20,000 (if desired). Likewise, if you added the full £20,000 into an ISA that grew in value thanks to investment returns, then that growth wouldn’t count towards the allowance. It’s a really good way to grow a significant savings pot over time.
There are three primary types of ISA – explained below – each with their own benefits and limitations. There are also Junior ISAs for people under-18 and Innovative Finance ISAs for those interested in peer-to-peer or crowdfunding.
We’ve written a handy guide deep diving into ISAs here, but today here’s the nutshell version.
Stocks and Shares
By putting your money into a Stocks and Shares ISA, you’re able to start investing – you’re buying shares, funds, government or corporate bonds and other investment types via the product. For example, at ikigai, we offer a Stocks and Shares ISA that automatically invests your money in an investment portfolio of Exchange Traded Funds comprised of stocks, shares, bonds and other securities.
A Stocks and Shares ISA generally requires longer-term investment (ie. you may need to lock the cash in for five years or more to see the best growth) but the benefit is that it gives your money one of the best opportunities to grow. Plus, the money is free from capital gains and income tax.
For background, the average stocks and shares ISA has historically generated around 6 – 7% annual return, although like all investments it does come with a level of risk and your portfolio can go down in value as well as up.
Two things to consider before you start are your appetite for risk and how hands-on you want to be with your ISA. Many providers and digital advisors, like ikigai, will assess how open you are to risk and can help you decide what kind of stocks and shares you want to invest in; if you’re less open to negative returns then you can choose investments that are typically more stable (like funds or bonds) compared to the more volatile (like shares).
Likewise, if you’re looking for a more hands-off approach, you can look for ready-made portfolio offerings – you should still check on these regularly to be sure it’s still meeting your needs, but you don’t have to think about each stock or share yourself.
These are the simplest and traditionally the most popular type of ISA. They’re essentially low-risk saving accounts, except there’s no income tax on what you earn via interest. It’s a stable way to save and you can choose whether to open a fixed or variable rate cash ISA (which pretty much just determines how long your money is held in the ISA before you can start withdrawing it).
Saying that, although they’re simple enough, the current climate and low-interest rates could mean that your savings don’t grow much in a cash ISA (and inflation could even mean your savings reduce in value over time).
The Lifetime ISA (LISA) is probably most familiar to those looking to get on the property ladder, as it’s somewhat taken over from the Help to Buy ISA. A LISA gives you a government bonus of 25% on the money you put in, up to a maximum of £1000 a year – which is fab for young savers or for older people looking for a retirement income in the future. However, it’s worth noting that a LISA has a withdrawal charge (25% of the amount withdrawn) if you decide to take out the money for anything other than a first home or before you’re sixty.
Tax treatment depends on the individual circumstances of each client and may be subject to change in future.
For many of us, our pension is something we’re signed up for by our work – and may not think much of afterwards. It’s a pot that we start contributing to, occasionally make decisions about in terms of how much we put in each month (often depending on the employer or if you change jobs), and probably don’t worry about unless we’re nearing retirement.
The first thing to note is that – yes – it is very useful to have a pension, even if you don’t think you’ll be able to retire until you’re 75. Whilst it’s not the only retirement product, it comes with a degree of tax relief and both the government and your employer contribute to it. As a nest egg, it can accrue decent interest and even returns in the right plan.
The second thing to consider is how many pension pots you might have and whether you can or want to consolidate them. Many people may find that they have multiple pots and plans from where different employers have provided different pensions. It’s useful to keep track of these and to look at whether consolidating some or all will mean better returns in the long term.
For more information on how much you should be contributing, Money Saving Expert have a good summary here and you can also read our piece on how much you should be saving for your age below.
When I bought my flat with my sister, both of us chose to write wills. It might seem morbid for a pair of 20-somethings, but a will tells everyone what should happen to your money, possessions and property after you die. Without one, if you die, your estate is considered to be ‘in testate’ and means the law will decide how it is passed on, regardless of what you might have wanted.
A will also makes things much easier for your family and friends and could help reduce things like the amount of inheritance tax they might pay on the value of what you’ve left behind. If you’d like to read more about this, we’ve written a piece on inheritance and the benefits of a will below.
Insurance comes in all shapes and sizes – for travel, buildings, contents, cars, bikes, pets, health, and even life insurance.
Insurance is something that many of us can benefit from – not only in the case of a payout but because it grants us additional peace of mind and those who might be lending to us (like mortgage lenders or car rentals).
For instance, for people running businesses, business and employee insurance provides a way of managing the risks of ownership and allows you to provide benefits like retirement plans. Similarly, for those who have long-term illnesses, or who become sick or disabled, health insurance can ensure you have access to good medical care or that you have time to recover without worrying about money.
Of course, not everyone needs every type of insurance – and you should be wary of signing up for multiple types of insurance that may overlap. By reviewing your personal circumstances and what you already pay for, you’ll be able to assess what makes sense for you in terms of your lifestyle, dependents, and financial situation. You can also shop around for comparisons so that you know you have the best insurance for you and your needs.
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We built ikigai specifically for those who want to bring their lifestyle to the next level, by taking better care of their finances.
ikigai beautifully combines wealth management and everyday banking in one single app. And by doing so, it creates a whole new world of opportunities.
Visit https://ikigai.money to find out more.Maurizio & Edgar, Co-Founders, ikigai
When investing, your capital is at risk.