In establishing your priorities you may wish to consider:
- Medium to long-term goals may include pensions, saving for a home, building up a reserve for a rainy day such as providing medical care for the family or redundancy, etc.
- Shorter to medium-term goals may include saving for school fees, private medical bills, home improvements, a new car, holidays, etc.
This can be achieved by estimating your income after allowing for tax, mortgage and necessary living expenses. From this amount set aside appropriate funds for top priority savings, perhaps to achieve your long and medium-term goals; the balance can then be split between short-term goals and spending money. Through this simple process you will be able to make decisions on how much you want to save for which goals, while balancing this with your standard of living.
You will then be in a position to align your savings to the appropriate investments with the aim of making your money grow to enable you to meet your goals at the correct time. Be aware of the factors that you consider important when setting savings priorities and choosing your investments will change gradually through your life.
- When young and single, with retirement a long way off, pension savings may be secondary to shorter-term goals such as improving your immediate standard of living, e.g. a car or a new hi-fi system or holidays. Lower risk and ease of access to cash may influence the type of investments you consider, e.g. bank and building society accounts, national savings accounts, Cash ISAs. Despite the bias towards shorter-term goals, an early start to saving a small regular sum for a longer-term goal such as buying your first home, will not go amiss.
- Earning a double income without children provides your partner and you with the opportunity to overcome the expense of setting up home and to start focussing on medium-term financial goals, e.g. an emergency fund, a larger house, a fund for future expected spending such as school fees. During this period, medium-term investments that generate tax-free income and utilise other tax allowances or providing suitable life assurance arrangements to prevent hardship for a surviving partner may be higher priorities for you. It would not hurt to consider long-term pension savings if affordable, but this may still be a lower priority goal for you at this time of life. If you are in an Occupational or Company Pension scheme, you may wish to take advantage of tax allowances by topping up where permitted.
- Often when young, married and with children your level of funds available to invest may be limited. You will need to keep a close eye on your savings and investment priorities and you may wish to review the levels of life insurance, as the financial burdens on a surviving partner will be considerable. Your goals may now be shifting the balance further towards medium term investments, generating tax-free income and utilising your full tax allowances. Again it would be appropriate to consider pension planning, and if affordable, increasing your contributions.
- In mid-life, as children progress towards adolescence and the burden of mortgage repayment becomes less onerous, surplus cash usually becomes available. Your medium term savings goals may already have been achieved with appropriate life insurance in place and your tax efficient investment allowances fully utilised. Review your life insurance policies to make sure that your estate's liability for inheritance tax is protected. At this time of life, long-term retirement planning is likely to become an ever-higher savings priority for you.
- During your pre-retirement period it is likely that earlier capital building medium-term investments will mature and become available for re-investment. Providing for income during your retirement will be a priority and planning to create tax efficient wealth for heirs may also be of importance. You may wish to review your investments and life insurance policies to minimise potential Income, Capital Gains and Inheritance taxes. As you move towards retirement, there will be an increasing tendency towards assets that are readily convertible into cash to cater for unexpected expenditure when there is no longer any salary.
Once you have set your priorities for saving, and you know what funds you can afford to put aside, you are well prepared for the next step in the process, understanding how Investment Risk can influence your choice of investment products. Click here to continue.
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Investment Risk
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