Key points of Junior Isas

• All children aged under 18 who did not qualify for a child trust fund will be able to open a Junior Isa. i.e. all those born after 3 January 2011 or before 1 September 2002
• Once opened anyone can pay money with the maximum annual contribution £3,600. This can be entirely in a savings Junior Isa (cash) or an investment version (shares, bonds, investment funds, and so on) or split across both.
• The benefits are the same as an adult ISA. Income or investment returns generated do not count towards a child’s tax allowance and effectively any income or capital gains can roll up tax-free
• No withdrawals are allowed until the child turns 18.
• When the child reaches 18 the Junior Isa can convert into a tax-efficient adult Individual Savings Account
• There is no government contribution to kickstart the fund as there was with Child Trust Funds

Issues to Consider

• Tax rules can change over time
• Terminal illness or death are the only reasons for early withdrawal
• Some children born between the above dates but that did not qualify for a child trust fund may be able to start an ISA
• The current maximum is £3600pa but this will escalate with the consumer price index CPI from April 2013
• Those with a CTF can’t open an ISA but the annual allowance has increased to the same £3600 level.

Comment by Anna Sofat
‘No withdrawals are allowed until the child reaches the age of 18 and then it is legally their money.

This is both a positive and a negative. The upside is that it fosters long-term, tax-efficient saving for the child. The downside is no flexibility to access the money early if it is needed and when it does become available, the child could choose to spend the lot without the parents’ consent.’

Is it worth saving for the future?

If so what are the best methods of turning your savings into a financially sound future?

Why Saving is Worthwhile

• Thrift and saving is a habit that is worth acquiring when you are young.
• Major expenditures can’t always be afforded in one go unless you have some spare cash or investments. With saving you can arrange to pay in full when required.
• Borrowing makes a major expenditure much more expensive when interest costs are included.
• Long term savings provide a cushion against a downturn in your personal fortunes
• Support networks and government help may not be available when you most need them. You can’t rely on charity.

Consuming  now instead of Saving

• There may be urgent needs to consume now to satisfy shelter, food or clothing needs for example.
• Much consumption is discretionary and desire based rather than essential.
• Over consumption can be very wasteful both in finance terms and environmentally. Why consume if you can’t get full utility from a product.
• Early consumption may create high expectations for the future that you can’t afford to service.
• The financial markets give ‘poor return so we may as well spend’ is a faulty logic as you need to have resources in the future and saving should be safe and capable of some return.

Types of Saving for the Future

• Long term savings are strategic and should have a definite purpose:
  • Pensions are a tax advantageous way of saving for later in life.
  • Property investment even by repaying your mortgage you are saving by growing equity in your home.
  • ISA’s and longer term saving products are aimed for periods over 5 years. They may be suitable for education needs, equalising earnings over a period, special events or one off costs.
  • Stocks and shares may be appropriate for long term investments / savings.
• Short term savings may just be building a pile of £1 or £2 coins for a night out or:
  • Deposit accounts with Post Office or banks.
  • Christmas clubs and credit unions may offer attractive benefits.
  • Financial products are marketed to savers but safety first – if it looks too good to be true  it will be.
  • For short term savings you want quick or instant access.
  • Some good deals are available as internet or postal only deals that keep lenders  the costs down.
  • Offsetting allows any money you have to be set against your mortgage. Savings in interest paid will be higher than the interest you can earn.

Summary Pros & Cons of Saving for the Future

• Interest received and left on deposit compounds up and over time you savings grow.
• Inflation can eat into the value of your savings. You could possibly buy more with your cash now than in the future.
• It is positive help to saving if you split your spending between ‘essential, desirable and optional.’
• With savings you can be independent.
• The country needs savers as much or more than it needs consumers no matter what the marketing and doomsayers are preaching during the recession.
• Saving little and often is one of the best ways. Set up  a direct debit now.

Resources

Explaining best buy savings tables

Best Buy Savings Potential Issues

• Top of the table now may not be top of the table next week!
• Progressively over a period of time some rates may become less competitive. Some accounts may be ‘outright loss leader’ offers just to attract new customers.
• Quoted rates often include a bonus (which makes the headline rate look good) but is only available for a short time
• ‘Conditions may apply’ that are like the small print in any deal. Often breaching these conditions during the investment will cause your savings to be put on a far lower interest rate.
• Small and foreign financial institutions are often in the top three. It may be appropriate to invest in Icelandic banks but it was false economy last time and we would suggest you select your provider from an organisation you know and trust.
• High rates can equate to higher risk even if that is only marginal on risk and rate.

Understanding the Technical Phrases

• AER is the Annual Effective Rate of interest you will earn (the rate you are interested in). In most cases interest paid annually will be the AER that is identical to the notional interest rate.
• The Account Name or title is important to the finance company. Make sure, if you open an account, you get the one you have researched and decided on. It is worth checking the paperwork before signing and making a deposit.
• If guarantees, conditions or bonus rates apply make sure they are explained. Keep a record of these terms in case of later dispute.
• Notice or term are issues of time and may restrict your access to your own money until the term is up or the notice period has expired.

Types of Saving Accounts Tabled

• No notice account repay instantly but best rates may have a minimum deposit. Some have a variable rate, a guaranteed rate for a period or a % over bank base rate
• Notice accounts will hold your money for the period of notice and bigger rates may be available for longer notice periods. Six months currently offers 0.19% more than 45 days.
• Internet only accounts save the finance company admin costs and rates are often higher than plain vanilla no notice accounts.
• Monthly Interest pays interest 12 times a year not annually. That can help the compounding of interest effect but is unlikely to be worth dropping the % rate.
• Cash ISAs may be instant withdrawal or be up to a 5 year commitment. The interest is tax free.
• Fixed rate bonds tie up your savings for a number of years. The interest reward should be better to reflect this fact.
• Special deals based on age are worth considering. Children’s accounts and over 50′s savings may tend to be less volatile from the finance house point of view so they may pay slightly better interest rates.

National Savings and Investments

• There are several NS&I products with deposits from £1 to £2,000,000. Direct saver, Easy access savings, Investment bonds and Income Bonds should be as safe as the Bank of England or better.
• Tax free products include savings certificates paying a fixed rate and indexed linked certificates paying an amount that varies based on the rate of inflation
• Children’s bonus bonds and savings certificates are issued for a period of time and have an ‘issue number’. When the conditions or rates change a new issue number is launched and the old issue becomes unavailable

Example of Conditions and Guarantees from Sample Accounts

• Rate fixed for 12 months but you can withdraw and add money without restriction or cost.
• Open to new savers who have not had a Direct Savings account with the bank for the last six months.
• Guarantees no less than 1.6% until 31 December 2011
• Guarantees to pay a Bank of England base rate plus 1.5 percentage points until 31 January 2012.
• After twelve months the rate drops to the standard Web Saver rate, currently 0.1 per cent.
• You are limited to making 5 withdrawals a year from your account.
• Just one free withdrawal a year allowed on this account.
• Includes 2.5 percentage point bonus payable for 12 months
• Includes 2.5 percentage point variable bonus for 12 months
• Includes a 0.69 percentage point bonus payable for the first twelve months
• Rate includes a 2.3 percentage point bonus paid for 12 months.

Comment From Finance Blog

• Savings is a competitive business and you need to have your wits about you as you can see from the list above. Banks will not keep you informed about your options.
• Check, at least every year, that what you are getting is what you want and are entitled to expect.
• Comparison web sites, accountants and financial advisers are often remunerated by commission for new business. We are not nor do we recommend any individual accounts or actions.

Resources

Why Save for the Future

Major effects of the credit crunch

• Difficult to borrow, especially difficult to get mortgage.
• Bank of England cutting interest rates is leaving us with negative real interest rates. Inflation currently 5.2%, interest rates 4.5% (and interest rates likely to fall to 3% soon
• Recession, causing unemployment to rise
• Lower real incomes. Workers accepting pay rises below or close to inflation to protect jobs.
• Falling Stock Markets

How To Survive Credit Crunch

• Don’t worry about buying a house. Prospects for buying a house will probably be much better in 12 months, when house prices have stopped falling. The next 12 months is an opportunity to save for a deposit if possible. In the current mortgage climate, it is even more important to save for a deposit, to enable a better mortgage rate.
• Keep a track on Savings. Although we have negative interest rates. Banks are keen to improve their balance sheets so are offering attractive rates for savers. Northern Rock, Abbey National and Halifax all are offering saving rates above the base rate. This is a way to protect the real value of your savings.
• Worried about safety of Banks. My advice is that if the bank / building society is British, your savings are as safe as you can get.
• Investment diversification. If you own shares you will have seen the value of your share portfolios fall. However, on long term price to earnings ratios, share are good value. They may continue to fall in the short term, but, in the long term, are liable to rise. Amidst the uncertainty, many are buying into gold stocks.
• Remortgage. Just because it is difficult to get a new mortgage doesn’t mean you shouldn’t continue to try and get the best mortgage deal. Even now, the benefits of remortgaging and avoiding your bank’s standard variable rate is as great as ever. (Checklist for remortgaging)
• Paying off Debt. Levels of personal debt in the UK are at an all time high. (See: Debt levels in UK) We are now waking up to the necessity of reducing debt and increasing our savings ratio. The current low rates of interest should be seen as an opportunity to pay off more than the minimum payments. Remember, even if interest rates fall to 3%, they could easily increase to 6% within a couple of years. Avoid the temptation to take on more debt because interest rates are so low. As usual, it makes sense to pay off the highest interest rate paying debt first. (10 Tips for paying off debt)

If we can stop doing these things we will make a huge improvement in our personal finances, for relatively little effort.

1. Eating out every Day

Eating out is an expensive way to live. It can be buying breakfast on the way to work or ordering a takeaway in the evening, you will find both take a high % of your disposable income. Even if we just get a takeaway coffee with pastry in the morning it can become very expensive if we make a regular habit of it. It takes a little more preparation, but eating at home will save us considerable money and it is also easier to eat what we want, rather than what restaurants are serving

2. Burying Your Head in the Sand.

I know many people who have problems with their personal finances and rather than trying to solve them they just try to ignore them. Unfortunately, trying to ignore issues of debt does not make them go away in any way. Instead what happens is that we end up with avoidable charges and interest payments. This is definitely a case where ignorance is not bliss. If necessary take the advice of others and find a way out of the debt.

3. Keeping up with the Joneses

If we are committed to keeping up appearances we can end up spending an awful lot of money on expensive brands. If you feel obliged to buy clothes from certain designer labels try changing your expectations. Maintain shows of wealth and fortune are not a reliable way to bring happiness and peace of mind; there will always be someone with more luxury goods than yourself. Change your mindset and look to buy something which offers good value.

4. Always Buying Brand New

There are many items where you can save considerable money through buying second hand. In particular this applies to cars, TVs and videos. Here you can make considerable savings with no loss of utility. This is not just making small savings, it involves making big savings.

5. Holding debt on Your Credit Card.

If you have a credit card debt and are paying interest at 17% your finances will inevitably continue to deteriorate. It is difficult to pay off the interest charges and reduce the credit card balance. Therefore, you can be paying a minimum payment for years and yet the debt will continue to grow. This is an example of how poor financial planning can make things worse. With a little planning and rearranging of your finances you can try to pay off the credit card debt saving yourself interest payments.

6. Feel Sorry For Yourself

If the idea of money just makes you depressed; if you always feel miserable because you don’t have enough money, then it will be difficult to do anything about it. When we just feel miserable at our state of personal finances we are not doing anything to improve it. With a negative mindset it becomes difficult to turn our fortunes around. We need to try and adopt a positive attitude, or at least an attitude where we think of steps we can take to alleviate the problem.

7. Being Lazy in Renewing policies

There is a competitive market for mortgages, finance and insurance. however, a significant % of customers never make any effort to find better deals and just renew with their existing provider because it is the easiest thing to do. In these cases we are throwing away potential savings of £100s. Our mortgage / insurance company will be happy because we are giving them the chance to make a high profit margin. They are benefitting from our inertia. If we spend a little time remortgaging and searching for a new insurance quote the time will definitely pay us back.

8. Assume You cannot increase Income.

Don’t feel your current job is the only source of income. If you look around you will be able to find alternative sources of income. Just a bit of extra income can make an important start for reducing debt.

9. Buy on Impulse.

Firms are very good at selling things. They try to exploit customers tendencies to buy on impulse and packaging.  See these tips for reducing overspending

10.  Renting Rather than Buying

Renting electric goods such as TVs and  DVDs is a very expensive way to enjoy the goods. It is much better to save up or even take a loan out rather than rent by the month. The short term gain of renting will soon become more expensive

Live with parents / relatives.

This may not sound very appealing, but, it can potentially save significant sums on your monthly rent. As this can be the biggest % of your monthly outgoings, it makes sense to look closely whether you can reduce your monthly rent. If moving in with your parents is not an options, look carefully to see if you could find somewhere cheaper to rent. Even a 10% reduction in rent, can save £100 a month. Don’t move to a place where you would be unhappy, but, cheaper doesn’t necessarily mean worse.

Make Saving A Priority

Rather than spending money and saving what is left over. Make it a priority to put aside a certain amount each month. This could be the first priority after receiving your paycheck. By making saving a priority it is possible to make real savings each month.

Eat and Drink In

By eating out and getting takeaways we can easily spend much more money than we intend. After adding drinks, eating out is usually more expensive than we realise. If we make a habit of eating out a few times a week, it can take a very high % of our disposable income. Another expense to watch out for is getting breakfast from a cafe. Even just a coffee and pastry can cost £4, $8. If we do this 5 times a week it becomes another significant expense.

Unnecessary bills.

Examine carefully, the various bills that you have, do you really need a landline and mobile phone. How often do you watch the 300 channels on cable TV? Do you actually have time to read to all the magazines you subscribe to? It is good to question how much you value various bills, rather than just continue to pay them out of habit.

Buying Second Hand.

For items like cars, it definitely makes sense to buy second hand, rather than brand new. But, also for electrical goods, it might be worth buying second hand on ebay, rather than full price. Alternatively, you could like me, buy all your electrical goods in US when you are on holiday and take advantage of the weak dollar. (Mac = $800, £700. Exchange rate 2$ = £1. Almost pays for the airfare itself.

Related:

• 7 Ways to avoid Overspending
• This blog entry featured at festival of frugality

These are some tips for saving for your first mortgage.

1. Be Committed

It is always easy to find something to spend our money on. However, if we really wish to save for a deposit, we have to give it a high priority. One way is to have a target income to save each month. This can be a % of your disposable income or a fixed amount. After getting paid you can put this amount straight into the bank. At least by doing this you will not be tempted to fritter it away on other things.

2. Save on Rent.

The most effective way to save money is to look at whether you can reduce your biggest outgoings. This is likely to be your rent. It is a catch 24 situation. You want to buy a house because renting is so expensive. But, it’s difficult to buy a house because you pay so much for rent.

• To reduce the cost of renting you could look to see if you are able to rent out another room.
• A drastic option may be to live with your parents / relatives. This may create a slight loss of freedom, but, if the rent is sufficiently low it can really give you chance to save a considerable amount.
• A final option is to move to a different area where the cost of renting is lower.

3. Direct Debit

If you set up a direct debit from your current account to a savings account you will make sure you save what you want to. Look upon this outgoing savings as a necessary bill like paying for electricity.

4. Reduce unnecessary expenditure.

To maximise your savings. You need to make sure you are not frittering away money on inessential items. For example, it may be possible to cancel magazine subscriptions and just read things on the internet. If you are a compulsive spender, have a look at this guide to preventing overspending.

5. Reduce Debt First.

Unfortunately, many of us who finish college first, are saddled with student loans and student debts. If we have debts with interest rate of over 5% we should commit to paying off these debts first. Otherwise the benefits from saving will be negated by the interest on our debt. If the student loan is at a very low interest rate and has a long term repayment then it is OK to continue a separate savings scheme, rather than putting all our energies into paying it off. See: Reducing debt

6. Make Sure you Maximise your return on savings.

Don’t just expect your current bank to offer the best return on savings. The market is increasingly competitive, so look around for the best deal. You may start off with small interest payments, but as your savings grow you will increasingly gain.

• Guide to getting first time mortgage
• Getting Mortgage on Low Income