Five Universal Truths of Saving
Posted on June 12, 2019
1. You can't force results
As the old adage goes, it’s about ‘time in the market, not timing the market’.
It may be tempting to steer your investments around specific periods or events in a bid to generate maximum return in the shortest amount of time. Truth be told, there’s a special satisfaction to knowing you’ve ‘gamed’ the system and unlocked success in a way that few others ventured to try.
However, all that glitters may not be gold - at least when considering the long term. Research into the FTSE index over the last 30 years shows that the relatively small gains enjoyed by dipping in and out of investments during prosperous times is in fact dwarfed by the missed returns that would result from simply leaving your money untouched.
The notoriously fickle, tempestuous world of the stock market is likely not the best place to take hopeful pot-shots, no matter how apparently grounded in reason or research. Instead, sensible investments left to mature in the right way have a far greater chance of accumulating value when given the time and space to absorb the blows and surf the crests in a more patient, steady fashion.
Not having your funds in the right place on those rare great days will of course mean missed opportunities for fast injections of growth, but not being in the market for the other 99.9% of the time will leave you missing out on a whole lot more.
2. Start before it’s the ideal time
There are very few people that don’t actually consider saving to be a good idea. Like most good ideas, however, many of us specialise in putting them off until it’s really necessary, or perhaps even too late.
As Truth #1 above demonstrates, if anything makes a difference to your investments it’s establishing a presence and sticking around for the long run - the longer the better, in fact. As a result, ‘today’ is always a day later than you should have started saving. The sooner you can start putting funds aside, the sooner your journey will begin and, if you’re trying to save for a particular purpose, the quicker you’ll arrive at your target amount.
In addition, taking the plunge and committing to a new savings plan will shift your focus away from what to flutter away your hard-earned money on over what you’re able to start accruing for yourself. Breaking the spending cycle that we’re all very well accustomed to is not only conducive to a consistent, healthy savings habit but could also free up money for other, more productive shorter-term goals outside of saving per se.
3. Consistency is key
It’s not uncommon for regular saving to fall by the wayside when spare cash suddenly becomes hard to come by or that elusive home improvement project finally comes within financial reach and the big budget spend happens.
This is all well and good, but the healthiest approach to saving is one that understands how putting a regular amount to one side - or any amount at all - during the good times, the bad times and everything in-between is paramount to creating the most significant potential returns.
Aside from the traditional automatic payments and standing orders, another reliable way of ensuring you always deposit at least a little of your earnings into a savings policy is to carry out a full budgeting exercise. Models like the 50/30/20 Rule or Zero Sum approach offer both flexibility and structure in your spending habits, all the while keeping one eye firmly on maintaining at least some contribution to any savings pots you may have.
4. Small sacrifices now mean more growth later
As explored within the 50/30/20 saving method, everyone has both financial necessities (mortgage, bills, food) and ‘wants’ that add a bit of non-essential enjoyment to life (new clothes, holidays, meals out, electronics). By assessing your outgoings in the ‘wants’ category, you may find a few surprises that could be eliminated or cut down on in order to free up cash that can be channelled into savings.
Have both a Netflix and Amazon Prime account for TV streaming? Pick one and stick to it, putting the money you would have spent on one into an investment that can grow for you. Paying over the odds for your internet or phone contracts? Shop around to find a less costly tariff that still covers your requirements. Fan of buying lunches from the shop around the corner every day? Switch to homemade meals and deposit the difference into your savings.
The main point to consider is that many of the items we buy on a regular basis and consider a fundamental need are actually little luxuries we award ourselves. Determining what you can forego and what you can reduce will mean you maximise what goes into your long-term financial investments - in turn potentially becoming much bigger luxuries on their own.
5. Don’t pool everything in one place
It might seem sensible to keep putting all of your available savings into a single policy to keep things simple and straightforward, not to mention making it easier to see precisely how well your funds are growing. In practice, however, you should always be striving for the right balance between capital preservation and capital growth.
The reality is that no two products are alike, and each type can be utilised in a different way to different ends; something that one combined lump sum couldn’t achieve. For example, ISAs can offer a great tax-free home for your savings. They can be flexible (depending on the type of ISA). You just need to pick the right one for your risk appetite, which gives you the access to your money that you require. They are also tax-free!
Alternatively, a Tax Exempt or Regular Savings Plan creates the opportunity to set aside regular amounts for a fixed point in the future, 10-25 years down the line. Similarly, should you be in possession of a more substantial amount to deposit, something like an Investment Bond could provide an appropriate home for returns over the medium-longer term.
Aside from the particular benefits of the various types of savings products available, spreading funds out over a well-balanced portfolio will create a healthy combination of accessibility, growth, tax efficiency and risk-vs-reward. It may be helpful to treat your savings and investments as a tool and a means to an end, as opposed to just a wealth-generator. Like any good toolkit, the more you have at your disposal the better equipped you are for the unpredictability of life.
This blog provides generic information and opinions of the writer and should not be relied upon for making investment decisions. No advice has been provided by Sheffield Mutual. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand. Any reference to taxation is based on the writer’s understanding of current tax legislation and practice, which could change in the future.