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 education costs, or to pay for the trip of a lifetime.
There is no single preferred approach to saving up this amount, as it will depend on your timeframe, your current financial situation... and even your age.
Before you begin...
There are one or two considerations before you begin saving: 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 almost certainly exceed any returns you make by saving. So try to be rid of this first.
It can also be helpful to build up an emergency fund that you can easily access before you start saving. This will help cover any unforeseen expenses, such as your dishwasher or boiler packing in, or your car failing its MOT.
How much is up to you, but here's what the The Money Advice Service recommends.
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 investing comes with an element of risk and the chance the value of your investments could go down. So the narrower your timeframe, the less time your money has to recover if there is a dip.
For terms of fewer than five years, you may wish to consider a savings account or cash ISA.
How long would it take you? Well, from a standing start, and as long as you don't touch your savings until you have 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. Take a look at all product terms and conditions.
Some banks offer special terms for regular savings plans, but typically these are limited to a one-year term, with a maximum monthly saving.
Thinking longer term...
But what if you have a longer 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 £7,812 today.
Over the long-term, investing in a stocks and shares ISA has the potential to outperform deposit-based savings.
If you are under 40 and saving specifically for a deposit for your first home, a Lifetime ISA, which has a £4,000 annual limit in 2019/20, may be worth considering.
A reminder: everyone aged 16 and over has an annual ISA limit which, for the 2019/20 tax year, is £20,000. This includes contributions to Stocks & Shares ISAs (from age 18), Cash ISAs and a Lifetime ISA.
Investing in stocks and shares
It's important to know that the value of investments in stocks and shares can rise and fall and you may not get back what you originally invested.
However, by giving your money as long as possible to grow – and ideally a minimum of five years – you’ll be in a better position to ride out any falls in the market.
One way to invest in stocks and shares is to open a Stocks and Shares ISA. Once in, you will be given the option to select an investment fund (or funds).
With an investment fund, lots of investors pool their money together and a professional fund manager invests the money in assets like shares, bonds, property, cash, or a combination.
Selecting the right fund for you will depend on your investment needs and your attitude to risk.
For instance, if you don't wish to take much risk, you should choose a low risk fund, which may invest mostly in government bonds, for example.
On the other hand, you may wish to take more risk and select a higher risk fund. In this case, the fund manager may invest more adventurously so the chance of growth (and loss) is increased.
Alternatively, you may wish to choose a fund that's somewhere in between.
Find out more about the Zurich Stocks and Shares ISA.
This article was first published in February 2018 and was last updated in July 2019.