You’re looking to save up a sum of money. You may have a specific amount in mind, but we’ll pick £10,000 as an example. This could be to go towards a deposit for a home, to help fund your child’s university fees or to pay for a trip of a lifetime.
There is no single preferred approach to saving up this amount, as it will depend on your ideal timeframe, your current financial situation… and even your age.
Before you start…
There are one or two considerations before you begin saving towards your goal: do you have any existing debts (outside of a mortgage), and do you have any current savings in case of an emergency?
You should pay off any credit card or store card debts before you start saving. This is because the interest rate on this debt will likely exceed any returns you make by saving, certainly in the short term. So try to be rid of this first.
It can also be helpful to build up an emergency fund before you start saving towards a particular goal. This will help cover any unforeseeable expenses, such as your dishwasher or boiler packing in, or your car failing its MOT.
The Money Advice Service – a free service set up by the government – recommends having three months' essential outgoings available in an instant access savings account*.
OK, ready to go…
When would you like your money? Your answer to this question should determine the savings path you take, and whether you invest or not.
If you want to achieve your goal within the next five years, investing probably isn’t the way to go. This is because, as we shall come to, investing comes with an element of risk and the chance the value of your investments could fall (and grow), so the shorter time frame you have, the less time your money has to recover.
You may wish to consider a savings account or cash ISA. How long would it take you? Well, from a standing start, and assuming you won’t be accessing your savings until you’ve reached your target, you would save £10,000 by setting aside £300 per month in a savings account paying 1.3% annual interest in 33 months**. Please pay attention to all product terms and conditions.
But what if you have a longer-term timeframe in mind? Inflation – the rate at which prices go up - means that saving for a term of five years or longer isn’t best suited to cash ISAs.
For instance, if inflation is 2.5%, then in 10 years’ time £10,000 will only buy the same as £7,810 today***.
Over the long-term, investing in a stocks and shares ISA has the potential to outperform savings, and, as with cash ISAs, you can currently invest up to £20,000 in each tax year.
If you are under 40 and saving specifically for a deposit for your first home, a Lifetime ISA, which currently has a £4,000 annual limit, may be worth considering.
Everyone has an annual ISA limit which, for the 2018/19 tax year, is £20,000. This includes contributions to Stocks & Shares ISAs, Cash ISAs and a Lifetime ISA.
Investing in stocks and shares
The value of your investment in stocks and shares can rise and fall and you may not get back what you invested but, by giving your money as long as possible to grow – and ideally a minimum of five years – you’ll be in a position to ride out any falls in the market.
And just as there are different ways to invest your money, there are also different options when it comes to stocks and shares.
Selecting the right fund for you will depend on your investment needs and what is called your ‘attitude to risk’.
For instance, if you want to take a minimal risk, which means the likelihood of your money losing value is low but so is your potential for growth, you can invest in the Zurich Horizon Multi-Asset Fund I, as this invests a smaller portion of your money in stocks and shares.
On the other hand, you may wish to go for the Zurich Horizon Multi-Asset Fund IV, which invests more in stocks and shares and therefore the chance of growth (and loss) is increased.
Want an idea of what your attitude to risk is? Take a look at our simple risk tool, which will give you an indication.
An increasing number of people are investing for the long-term: HMRC**** figures showed a 33% drop in the amounts being invested in cash ISAs during the 2016/17 tax year, whereas stocks and shares ISAs hit a record high.
If you’re thinking of investing in a stocks and shares ISA with the aim of reaching a lump sum goal, Zurich’s ISA calculator can help. Have a play to get an idea of how much you might get back if you invest your money in a Zurich Stocks and Shares ISA.
***https://www.zurich.co.uk/stocks-and-shares-isa/isa-tool (see under important information)