Make ‘small sacrifices’ to build savings pot of £10,000
Alternatives exist for struggling young workers
YOUNG workers who struggle to save could build a £10,000 pot in seven years by saving £5 a day on shop-bought coffees or lunch.
That is the claim from one provider of stocks and shares ISAs as the stock market booms ahead ofanewtaxyearforISAs.
Fidelity International has calculated that by making “small sacrifices”, such as making a packed lunch and diverting £100 a month from the sandwich shop to a savings shop, the cash-strapped could get saving via the stock market.
It would take seven years and five months, with an investment growing at five per cent a year and low fees, to reach £10,000 – or nine years if you gave up an £80 a month gym membership instead. Even ditching the daily cappuccino at £2.50 a time could conjure up £10,000 in 13 years, on the same assumptions.
Switching from smoking to saving, meanwhile, could deliver a real bonanza. At just over £200 a month the transfer would achieve the £10,000 in three years and 10 months.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “Many investors may struggle to stump up a lump sum to get their ISA portfo- lio started, but you could quickly build up a significant ISA pot by simply saving on small daily expenses, such as the cost of your daily cappuccino.
“The longer you can save for, and the sooner you start, the better your results will be, given the snowball effect of compounding.”
While stock markets have been performing well in recent months, with the FTSE 250 enjoying its best performance in two years this week, money held as cash is being eroded by rising inflation.
As consumer price inflation currently stands at 1.8 per cent and the average rate paid on savings accounts is 0.39 per cent, according to Moneyfacts, the actual value of money held in cash savings is going down.
Calum Bennie, of savings provider Scottish Friendly, said: “The greatest struggle is for savers who continue to suffer as there seems little prospect of a rise in interest rates in the near future.
“People looking to put money aside for several years might consider investment ISAs as an alternative to get better long-term growth potential.”
David Thomson, chief investment officer at Glasgow-based VWM Wealth, agreed, noting that “compared to many other investments, ISAs can grow rapidly in a largely tax-free environment”.
“Their flexibility means they punch well above their investment weight,” he added.
Despite this, young people in particular are finding it hard to save full stop, which is having a wider impact on their lives.
A survey from Zurich found that more than half (56 per cent) of 18 to 34 year olds blame a lack of savings for preventing them from achieving life goals, such as starting a family or travelling the world.
Meanwhile, the latest Close Brothers Business Barometer found that in the workplace a third of people in that age group said that money worries have affected their ability to do their job.
However, less than half of UK businesses believe financial education is important for their staff at the start of their career, the survey found.
Jeanette Makings, head of financial education at Close Brothers, commented: “Where employers
‘‘ You could quickly build up a significant ISA pot by saving on daily expenses such as your daily cappuccino
can make a real difference is in providing young staff with the tools, understanding and support they need at the point of entry, skills that will ensure they will be able to confidently navigate their financial future throughout the rest of their career.”
The savings industry this week welcomed the Government’s plans to create a single body for financial guidance which would replace the current Money Advice Service, Pension Advisory Service and the free, government-backed Pension Wise.
The Tax-Incentivised Savings Association (Tisa) said 40 per cent of adults are not in control of their finances, leading to high levels of debt, low levels of saving and financial insecurity through their working life and retirement. Notably, six million employees, or a third of the private sector workforce, and 4.5 million self-employed people are outside the scope of automatic enrolment into a pension at work.
Tisa said the new body should “focus on financial education, help those in debt, encourage short, medium and long-term savings to enhance financial resilience, plus protect consumers from scams and fraud”.
Charles McCready, director at Tisa, added: “There is a nationwide savings gap which needs to be addressed through greater awareness of the importance of long-term saving, improved accessibility and guidance that covers the full range of consumer needs.
“The Money Advice Service, The Pension Advisory Service and more recently, Pension Wise have provided valuable guidance to consumers and encouraged higher levels of saving, both for retirement and to provide resilience against the life emergencies.
“We believe that their services should be consolidated into a single financial guidance body for greater consumer clarity and engagement.”