The Simple Guide to Saving and Investing

The information below is not professional investment advice. If in doubt, please consult an independent financial adviser.

This post may contain affiliate links. For more information please read my disclaimer.

Personal finance is an important topic and financial literacy, having the knowledge to make informed and effective decisions about one’s finances, is something I am genuinely passionate about.

The world of finance and money management can be complicated so I want to introduce some basics of saving, investing, using credit and how to think about money. I’ll try to make it accessible and recommend some products and services that I use.

Why should you care about any of this?

Money makes the world go round. In an era of crippling debt and high levels of uncertainty, it’s important to understand your financial situation and take steps to help build a solid foundation to give you security in the future. If you’re patient and consistent with your finances you could live a very comfortable life – and who doesn’t want that!?

First, what’s the difference between saving and investing? Here are a couple of definitions:

• Saving – is putting money aside, bit by bit. You usually save up to pay for something specific, like a holiday, a deposit on a home, or to cover any emergencies that might crop up, like a broken boiler. Saving usually means putting your money into cash products, such as a savings account in a bank or building society.
• Investing – is taking some of your money and trying to make it grow by buying things you think will increase in value. For example, you might invest in stocks, property, or shares in a fund.

How to think about saving and investing

The problem many people face is that when they get paid they spend first and then have little left to save and invest at the end of the month. To put money aside consistently, the trick is to switch it around. Invest and save first, and then spend what you have left.

The best way to do this is to automate your saving and investing, removing any willpower required from you to do so.

Tip: Create a recurring direct debit that transfers x% of your income straight into your savings and investment accounts.

The rest of the money is yours to spend! (After bills and rent, of course).

Why should you invest?

While saving is important, investing is more powerful for a few reason:

1. If your money is sitting in a current account or low-interest savings account, it is losing value over time. This is because inflation erodes the value of money. Prices of goods and services rise over time (inflation), meaning £100 in 5 years will buy fewer things than £100 today. Instead, by investing in different assets, like stocks and bonds, you’ll generally get a better return than leaving it in a savings account.
2. Investing for the long term means you benefit from compound interest. This is when interest earned on the principle (initial money put in) is reinvested and further interest is earned on that interest. Theoretically, compound interest can lead to exponential growth and is what Warren Buffet attributes as the single most powerful factor in his investment success – and he’s got a few bucks!
3. Investing can help you achieve your financial goals, even financial freedom. Also, it’s pretty easy to do. You can make money work for you with pretty minimal effort.

Where to Save and Invest

Okay, so you want to save and invest to grow your wealth. But where to start?

Here I introduce you to the Ladder of Personal Finance inspired by Ramit Sethi’s book I Will Teach You To Be Rich. You should focus on that at the top of the ladder before moving down. The below are tailored for those in the UK but I’m sure there will be equivalent options for other geographies.

Lifetime ISA (LISA)

The Lifetime ISA (individual savings account) is a tax-free account into which you can invest up to £4,000 a year. The best part is that the government will throw in 25% of any contribution you make. So if you put in £4,000 the government will put in £1,000. That is an incredible deal.

If you’re yet to be a first time home buyer then this is a must as any money you put in a LISA can be used towards the purchase of your home. If you’re already a homeowner, this account is an excellent choice to save for retirement.

You have two options for a LISA:

• Cash LISA – You earn interest on your money and there is practically no risk to your money.
• Investment LISA – You can use the money in this account to invest in stocks and bonds which could provide higher returns but also has the risk that the value of the portfolio could go down in the short to medium term.

For a full breakdown of LISAs, and everything you might want to know check out this excellent article on MoneySavingExpert.

Personally, I have a Cash ISA with Moneybox but if you’d like to compare other options check out any comparison website.

Stocks & Shares ISA

Once you’ve maxed out the £4,000 allowance into your LISA you still have £16,000 you can invest in other types of ISAs (you’re only allowed to invest £20k into different types of ISAs each financial year). The next account you should put money into is a Stocks & Shares ISA.

Here, you can invest in funds (shares or bonds from various companies pooled into one investment), bonds (effectively a loan to a company or a government), and shares in individual companies. You don’t pay any tax on returns made from investments held in your Stocks & Shares ISA.

There is endless literature on strategies to invest but because I am all about making things easy and hassle-free I would highly recommend getting a fixed allocation investment ISA with Nutmeg. The benefit of this is that you do not choose individual stocks and bonds. You simply answer some questions to determine your risk preference and a portfolio is allocated to you accordingly.

Although this gives you less control, you don’t need to do anything else except consistently invest in the account. It’s a great option for people that want all the benefits of investing without all the hassle of actively managing and keeping an eye on their portfolio, plus the fees are much lower than an actively managed portfolio – where an actual person manages your investments. Nutmeg also gives you options to invest more responsibly and gives your portfolio a social responsibility score.

I have this type of account and have been really happy with returns over the past few years. Use my referral code if you’d like to open an account and get 6 months free with no fees.

As always, there are other options out there so feel free to shop around and figure out what’s best for you. I just like this option as it’s simple but effective.

Side Note: If you really can’t stomach investing at all then an alternative to the Stocks & Shares ISA is the Cash ISA. It’s basically a savings account but the interest is tax-free.

High yield interest savings accounts

So you’ve exhausted your £20,000 ISA limit – well done! The next type of account is a high-interest savings account. The best options tend to be with online banks as their overheads are lower so they can offer better rates, but they’re still hard to come by.

If you opt for an easy access account where you can withdraw your money with a few days notice or less then the interest you earn will be lower. If you go for a fixed rate account where you cannot withdraw your money for a fixed amount of time the interest you receive is higher. Which you go for is down to personal preference and circumstance.

To look at options check out this comparison site.

Current Account

This is for your day to day spending. Nothing more to say. Except that there is a better way to earn money/rewards as you spend. And that’s with credit cards – read on!

Credit Cards

Credit cards sometimes get a bad rep as a source of spiralling debt. And they certainly can be if used irresponsibly.

Credit cards are an excellent way to earn points to spend on shopping, holidays, vouchers and more, all from just your regular spending. Most importantly they help boost your credit score if used correctly which can have major implications on your ability to borrow in the future such as for a house. Here’s a secret – if you’ve got a great credit score then you could potentially save thousands with favourable mortgage terms.

Using a credit card requires a mindset shift. It’s not free money. It’s just another account from which you spend what you earn and you should pay off your credit balance in full at the end of every month. If you’re not confident that you can spend within your limits and pay the balance off in full then don’t get a credit card. It will wreck your credit score and you’ll end up paying loads in fees so it just isn’t worth it.

But if you’re confident you can use it sensibly (and most people can) then doing most of your regular spending on your credit card is worthwhile.

It’s generally not worth paying for a credit card as it cancels out any benefits you might earn so keep an eye out for a free card. An excellent introductory offer is with the American Express Gold card which is free for the first year.

The gold card is great for earning points that can be used for a variety of things but are best used for air miles and hotels. There’s a great article by The Points Guy breaking down all the benefits of the gold card and how points can be redeemed.

Apply here for an American Express Gold Card and get introductory points and a new member deal!

Note: Once the free year is up make sure you switch to one of Amex’s free cards otherwise you’ll be charged £140 a year. A good choice is the British Airways American Express Credit Card.

Other Practical Tips

Now we’ve got the bulk of the investing information covered there are a few other things I want to talk about that I found to be really helpful when thinking about money and generally about my finances.

1. Figure out what you care about. It’s easy to throw money at everything everyone else is doing but which might not be worth it for you. Focus on spending your money on the things that matter to you. Even if it’s that amazing morning coffee – have it. Spend on the thing that matter. Just cut back on things that don’t.
2. Be mindful of recurring expenses. Subscription services like Netflix, Amazon Prime, Spotify etc. slip under the radar. Consider how many of those services you need or use. If it’s not being utilised just cancel it – £10 here and there can start adding up. Also, look at what you can split with friends or family. No more free riding!
3. This probably should have been right at the top but make sure you pay down your debts before you start investing in all the accounts I mentioned above. The first thing you should ensure is that you pay your credit card bill followed by any high-interest loans you might have.
4. Sign up for your employers pension scheme. In the UK, employers must enrol you into a pension scheme by law unless you opt-out. It’s worth checking if your employer offers ‘contribution matching’ where they will match however much you put in, up to a certain amount. Max this out. It’s more, tax-free, money and while you pay a bit more into your pension now, you’ll have a bigger pot waiting for you in retirement.

And that’s it for the intro to saving and investing! There’s a whole lot more I can talk about so let me know if there’s anything in particular that you’d be interested to learn more about. I hope this has been helpful and thanks for reading! Your personal finance journey starts today.

List of links

• Moneybox – Lifetime ISA
• Nutmeg – Stocks and Shares ISA
• American Express Gold Card
• MoneySavingExpert – excellent website for all things money
• I Will Teach You To Be Rich