Ask an ex­pert

Our ex­pert re­porter Jonathan Jones an­swers read­ers’ ques­tions. This week: the best place to put your cash to make it grow

The Sunday Telegraph - Money & Business - - Money -

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.”

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