Saving and investing
Step 1: Understanding saving
Saving is what we do when we put aside some of our money rather
than spending everything we have coming in. There are lots of
different ways to save, for example by paying some of our wages
straight into a savings account at the bank or building society or
becoming part of a Christmas saving scheme. However we choose to
save, the general idea is the same: that we build up some money –
savings – that we can use if we need to, for example to buy a big
item such as a new fridge, go on holiday or to cover the cost of
expensive times like Christmas. Having savings also gives us
security by making sure that we have some money put aside for
emergencies or unexpected costs.
Step 2: Do I have enough money to save?
Before you can save, it is important to know how much spare
money you have to put away. Why not look at our section on Budgeting to learn more?
It is also a good idea to pay off any debts (apart from your
mortgage) before you start saving or investing because the interest
you pay on debts will usually add up to more than the interest you
make through saving. See Managing
Debt.
Step 3: Where can I save?
Once you know how much money you have to save, the next step is
to find the best place for your savings. As interest plays a big
part in helping savings grow, many people look for a savings
account that pays the highest interest. For an explanation of what
interest is and how it helps our savings grow, see Interest.
- Bank or building society savings accounts – banks and building
societies are probably the most common place to save money. They
offer different sorts of accounts, for example those that you can
get your money out of straight away and those that tie your money
up for a month or so. The money pages of the weekend newspapers
usually have tables featuring the accounts with the best interest
rates.
- Individual Savings Accounts (ISAs) – the Government introduced
ISAs in April 1999 to try to encourage more of us to save and
invest our money. They allow us to save or invest a certain amount
of money each financial year (which runs from April to April)
without having to pay tax on any of the income we receive. See the
HM Revenue & Customs leaflet explaining all about
ISAs (link
opens in a new window).
- National Savings – these are savings products issued on behalf
of the government, which makes them a very safe way to save. With
National Savings (link opens
in a new window), you earn interest as you would with a bank or
building society.
- Credit union savings accounts – credit unions offer savings
accounts that are similar to those you find at banks or building
societies. The differences are that to save with one, you need to
be a member of the credit union and instead of getting interest,
you get what is known as a dividend. This is an extra sum of money
that is like interest but it usually gets paid as a lump sum once a
year. As dividends depend on a credit union’s profits for the year,
there is also no guarantee that you will get a dividend every year.
To find out more about credit unions, see The Association of British Credit Union Ltd
(link opens in a new window) website.
- Christmas saving schemes – because Christmas is such an
expensive time for most of us, clubs have developed to help us save
up throughout the year. This means we do not have to pay for
everything in one go or run up debts to cover costs. Christmas
clubs are run by a wide range of organisations such as the Post
Office, credit unions, shopping centres and supermarkets. For more
on saving for Christmas, see
Consumer Direct (link opens in a new window).
Step 4: Investing for the long term
As well as saving, people also invest money. This is similar to
saving because we still put aside some of our money, but instead of
saving into an account we invest it. This means that we buy
something that we hope is going to go up in value so that when we
sell it we will have more money than we started with. Examples are
property and shares. When we invest, most of us are usually trying
to build up a pot of money for the future, for example for our
retirement or for further education for our children.
Understanding risk
With investments we tend to tie up our money so we cannot get
hold of it in the short term and we also usually take some sort of
risk with our money because there is no guarantee that whatever it
is we are investing in – perhaps some shares or a house – will go
up in value. Instead, they might go down in value, which means we
would end up with less money than we started with. The reason
people are willing to take risks with their money is because where
there is also usually the chance to make more money. If you are not
happy to take the risk then you can save your money instead,
putting it somewhere safe where it will not have the opportunity to
grow rapidly but you also will not run the risk of losing it.
Step 5: Where can I find out more about investing?
Last updated: 27 April 2010
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