Savings: Getting Started
The sooner you can start saving/investing, the better. The famous Chinese proverb, “The best time to plant a tree was 20 years ago. The second best time is now.” comes to mind. And the reason is because of compound interest. The best way to show the power of compound interest is with an example!
Let's say you have £1000 in an account which pays 10% interest annually (APY). After 1 year, the amount you would have is the £1000, and the interest on top, £100. You now have £1100. For the 2nd year, we do the same with the new amount we now have, 10% interest on £1100. However, as you'll no doubt notice, we are now getting interest on the interest we earnt from the previous year!
In fact, if you left the £1000 in that account for 10 years, you'd have made more money interest than what you started with...
Now with this example, the interest is much higher than what you'd get from your everyday bank due to the ongoing financial difficulties of Covid-19 and other circumstances. This example also compounds yearly, some accounts compound daily, weekly and also monthly! The more often your money compounds, the better the returns!
Above example with different compounding intervals:
Daily - £2,717.91
Weekly - £2,715.68
Monthly - £2,707.04
Yearly - £2,593.74
So, to summarise, compound interest = life-changing. If you're still not convinced, try playing around with some compound interest calculators and punch some numbers in!
Throughout the remaining part of the article, I'll be covering 4 key and essential ways to save, accumulate and accrue wealth. They form the backbone of a successful financial portfolio for all students to use to relieve the burdens placed by university.
1 in 10 Brits (9%) have no savings at all.
A third of Brits have less than £600 in savings.
The average Brit has £6,757 saved for a rainy day.
The number of Adult ISAs in the UK is up from 10 million in 2017-2018 to over 11 million in 2018-2019.
The average amount in Adult ISAs has fallen from £6,466 in 2017-2018 to £6,049 in 2018-2019.
The number of Junior ISAs in the UK is rising, with just below 50,000 extra accounts opening in 2018-2019.
The average amount invested is now £1,020, up from £994 last year.
If there's only 1 thing you take away from this article, let it be this section. An emergency fund is an account where you have put away an amount of money only to be used in emergencies. Not for holidays. Not for a new car. Not for a new phone. Strictly shit hits the fan situations.
The amount you should keep in the emergency fund entirely depends on your circumstances. First, you should build it up to be 1 month's outgoings. Rent, phone bill, food, etc. You can then extend it to 3 months, 6 months and even a full 12 months if you so wish. A good round amount to aim for initially is £1000. You can then build this up to however much you are comfortable with.
Most importantly though, you need to be disciplined. Ideally the money you put into this fund shouldn't really be removed/taken unless for a rough situation when you absolutely need to.
The type of account you need to be looking for is an easy-access or instant-access savings account. You can also use your current account if you want.
Who likes free money and wants to own a house someday?
*everyone raises their hand*
Everyone, especially students, should be looking at this type of savings account. This is the new and improved version of the Help-to-Buy ISA, the one which everyone stuck £1 into November 2019 and forgot about.
The Lifetime ISA allows you to save up to £4000 per tax year (April to April), with the incentive of you receiving 25% on top of whatever you put in. In simple terms, put a max of £4000 in, get a max of £1000 for free added on top.
Great right? What's the catch? The catch is that any money you put is locked away until retirement, or for when you buy your first home. However for those who are first time buyers, this account is basically the Holy Grail.
You don't even have to put the full £4000 in, it's as much you can! The account can be a cash or stocks and shares account, with the latter being where you use the £4000 to buy stocks and shares in companies. This is a riskier way to use the account, but if you're planning for the long term, can be the right thing to do.
This type of account isn't widely available, and is only offered by a few providers. The best one in my opinion is Moneybox, who offer both types of LISA and also offer other types of account such as Pension, a standard Stocks and Shares ISA, and a fixed-term savings account.
Stocks and Shares ISA
A slightly more risky type of savings account, but for higher rewards and for those with a more long term outlook.
A Stocks and Shares ISA allows you to buy individual stocks and shares in companies, active funds and/or index funds. There are a lot of providers, including Trading 212, AJ Bell, Vanguard, Moneybox, iWeb, Nutmeg, etc.
You can buy Tesla, Google, Facebook, Amazon, Microsoft, and a lot more through these platforms, or you can buy ETFs (exchange traded fund) which tracks a specific industry or index.
It's a common consensus that the best way to tackle stocks and shares is to have time in the market, and not to time the market. Most people have monthly standing orders into their ISA to buy a specific fund and to just hold it for decades.
This type of account can be seen as an extra retirement sweetener. Over a period of 20 years, the stock market has always produced a positive yield.
The risk is that stocks, shares and funds can decrease in value. In 2008, the S&P 500 lost 37% of it's value. If you had invested £1000, it would be worth £630. In the next year, 2009, the market increased by 26.46%. This would have brought your value up to £796. In 2010 you would have seen another increase of 15.06%. In 2011, a small increase of only by 2.11% It was not until the 2012 increase of another 16.00% that you would be back over the £1,000 invested with an investment value of £1,085. Now this is an extreme case as it was the Great Financial Crash, but something to be wary of.
However, between 2000 and 2019, the average annualized return of the S&P 500 Index was about 8.87%.
The 3 types of accounts we have spoken about are the Holy Trinity in my opinion.