A regular savings plan is one of the most effective ways of building a nest-egg for the future.
Saving regularly can be a painless way to accumulate funds, particularly if you set up a direct debit to deduct this money on pay day. Set aside £100 a month, and you will have squirrelled away £1,200 after one year, or £6,000 over five years – and that’s before counting any returns on investments. Trying to find a lump sum of this size to invest can prove more challenging, without getting a bonus, bequest or some other windfall.
Compounding the issue
The longer-term impact of regular savings should not be underestimated, as you can benefit from compound returns – that is getting investment returns on your investment returns. Over longer periods of time, compounding could significantly boost the value of your savings.
For example, a 5% return on a £1,000 investment gives you £50. With compound returns, if you leave that £50 invested along with the original £1,000 and get the same return, in the second year you could get £52.50, as you’ve earned 5% on £1,050. Over 10 or 20 years this effect can help snowball the value of your investments.
Those putting money into a stocks and shares ISA or other investment plan will find that regular saving helps smooth out the ups and downs of the stock market. There is an old investment adage that it is time in the market, not timing the market, that makes investors’ money. With a regular investment plan you are not trying to second-guess market movements, so you don’t run the risk of missing days when stock markets rise significantly.
Of course, this also means you will keep investing through market downturns. But if markets fall, you will be buying shares, or units in a fund, at cheaper prices. This means you could benefit as and when markets bounce back. The technical term for this is ‘pound-cost averaging’.
Please let us know if you would like to discuss your savings strategies.
The value of your investments, and the income from them, can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.