Ask an expert
Our expert reporter Jonathan Jones answers readers’ questions. This week: the best place to put your cash to make it grow
Save or invest: which is more responsible?
I am trying to be more financially responsible this year. Am I better off investing my cash or should I just put it into a savings account? NB, BIRMINGHAM
The start of the new year is a time when many people evaluate their financial options for the year ahead, creating a plan for how much – and how – they will aim to save.
As a first port of call, it is wise to build up a “rainy day” fund before thinking about investing. This should give you a cash buffer in case of an unexpected illness or job loss.
How much you put in this pot really depends on you. Common wisdom advises putting three months’ to a year’s salary away.
To create this pot, there is little point setting up a cash Isa, a wrapper that allows you to put away £20,000 a year tax-free. This is because anyone paying the basic rate of tax earns their first £1,000 of interest from their savings accounts tax free. Higher-rate taxpayers have a £500 allowance.
With the most competitive easy-access savings rates around 1.5pc, you’d have to have around £67,000 before you’d incur tax charges.
But cash is not always the best place to hold the bulk of your savings, as interest rates are currently lower than inflation. This means that over time your money will buy less.
Once you have enough set aside in your rainy day account, you should look to maximise your stocks-and-shares Isa allowance. Investing is a medium to longterm strategy, so this should be money you can afford to put away for several years.
Over time, the stock market generally rises and the longer you invest, the more chance you have of making money.
While it might be a nerveracking time to invest, ahead of the Brexit vote, typically the earlier in the year you invest, the better, said Jason Hollands of wealth manager Tilney.
He noted that, while 2018 was one of those years when markets lost investors money, it was rare to have two bad years in a row and poor years were often followed by positive ones.
Mr Hollands said 2019 could be better than many people expected and therefore the earlier you invest the more you will make. You can put as much into the Isa wrapper as you want at any one time (up to the annual limit) but it is best to drip-feed this money into investments monthly to protect yourself from any sudden drops in share prices.
What should my son do with £1,000 gift?
My parents gave my 10-year-old son £1,000 at Christmas to start a savings account. Is a savings account the best use of the money? HT, SURREY
That is a very generous Christmas gift from your parents and requires careful consideration.
Martin Bamford, managing director of financial advice firm Informed Choice, recommended splitting the sum into four equal parts of £250 to spend, save, invest and give.
Firstly, why not allow your son to buy something that he has wanted for a long time or spend on doing something fun. It is a present, after all.
Opening a cash savings account is a good idea. It will help to teach your son about the security and stability of cash and will gain some interest. For instance, HSBC is currently paying 3pc on its instant-access children’s account.
The third quarter of the money should be invested, something that many of us only start to learn about in our adult years.
Letting your son invest in a company that he knows or likes could build up an early willingness to invest. I remember my own father investing in Watford Football Club on my behalf when I was around your son’s age.
Finally, encourage your child to give some of his windfall to good causes. Mr Bamford said: “He will understand the difference charitable giving can make to the world.”