How to make the most of your savings habit
We all want to save more, but many of us struggle to hold on to any money we've tucked away.
By Emma Simon
Saturday 11 February
Seven out of 10 adults in Britain say they are savers, but only a third actually managed to boost their bank balances and investments last year, according to a new report. Although the rest were putting money aside each month, they also admitted that they withdrew at least an equal amount from their savings over the year. And it is families with young children - the so-called "squeezed middle" - who are struggling the most to save. The 35-44 age bracket was the group more likely to withdraw savings than add to them over the year.
The report, by HSBC, found that wider economic problems were affecting consumers' ability to build both short-term and long-term savings. Not surprisingly, the biggest problems were reduced disposable incomes, higher bills, rock-bottom interest rates and rising unemployment.
Despite this bleak outlook, the report found that the numbers saving in 2011 were actually up on the year before. What's more, when asked about their intentions for the year ahead, 36pc said they planned to put aside more, compared with just 17pc who expected to save less.
But it emerged that longer-term goals such as saving for retirement, helping towards future university costs or buying a second property were losing out. With money tight in many households, and anxiety about job security remaining high, people are tucking away any spare cash rather than spending it. But it isn't going into pensions or other long-term investments; typically it is saved in the bank as a "rainy day" fund for holidays, Christmas or a new car.
In total, the average savings and investments portfolio is now worth £17,875; this includes the value of investments but not company or personal pensions.
But despite the low returns paid on deposit accounts - not one high street bank account now pays a "real" return once tax and inflation are taken into account - this is still most people's preferred method of saving. ......
..........But while cash is still king, these low returns are forcing a greater proportion of people to step up the risk ladder and invest in a more diversified range of assets. According to HSBC, around a quarter of savers now have some form of shareholding, such as an equity Isa or unit trusts - and almost one in five holds bonds or other fixed-interest investments.
With bonds or equity-based investments, there is a risk that the value of your capital can go down - although holding a diversified range of assets and investing for the long term markedly reduce this risk. And as investment experts point out, keeping your money in the bank is not risk-free either. Money held on deposit loses its purchasing power if the interest it earns does not keep pace with inflation. With rates expected to stay at record lows for at least another two years, this "slow motion bank robbery" looks set to continue. Over the short term, the effect may be negligible - but if inflation runs at 5pc, your money has effectively halved in 15 years.
In contrast, the returns from bonds and equities have, historically at least, provided a better hedge against inflation. Steve Wilson of Alan Steel Asset Management said: "Even if you get a return of 3pc on your savings, it's going to take more than 24 years to double your money.
"There are risks involved in equity-based investments, but there are some excellent funds out there that have a track record of delivering long-term returns. " For those who can shoulder a degree of risk, he recommended the Troy Trojan fund, which has delivered a 46pc return over the past five years. He also likes the Investec Cautious Managed and Invesco Perpetual High Income funds, which over the past decade have returned 85pc and 146pc respectively. As he pointed out, these are substantial returns given that the main equity indices have remained flat over this period.
Quote courtesy of the Telegraph
Saturday 11 February 2012