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www.InvestmentGuide.co.uk You may inherit money or win it in a Lottery or the football pools. But you can't count on such a windfall and if you want to build up a capital sum, you will have to do it by turning your income into capital. Here are a few hints on how best to go about it.
The investments you choose need to be those which give a good return but are also convenient for your purpose. Building capital requires investments where income and capital gains can accumulate.
In order to build up a capital sum, you have to invest regularly. This is a commitment each month usually by direct debit or standing order or by direct deduction from your pay.
Don't overcommit yourself. That is probably the biggest pitfall of regular investors. Only invest as much as you can afford when you start and choose a means of investing which allows you to raise or lower your contribution without penalty when you want to.
Borrowing and investing
Before you set about investing towards something, think about your borrowing. Investing and borrowing are the reverse of each other. You would do better to reduce the amount you are borrowing rather than saving up separately. So if you are paying interest on a borrowing, like a credit card bill which you don't pay off in full at the end of each month, pay that off first before you start investing. By paying off your credit card bill you may save paying 10% to 25% interest a year whereas your investments will almost always generate lower rates of interest (if they didn't all the banks would soon be bankrupt) . The actual rates may change but rates for lenders and borrowers go up and down together and it's always the borrowers who end up paying more.
There is another reason to pay off borrowing before you start to invest up capital. You generally have to pay income tax on the interest you receive from investments. But you rarely receive tax relief on interest you pay on borrowed money.
In general terms the cheapest form of borrowing is a mortgage to buy your own home. The most costly is a credit card from a store or a chain of stores. If you are self-employed, you can benefit from tax relief on most borrowing for the business including overdraft interest. So borrow for the business and not for yourself.
Offset Mortgages also known as "One" accounts
These are a financial product where you combine your mortgage, your bank current account and your savings account into one.
With all these schemes you have to have a mortgage. With a normal mortgage you are committed to pay regular payments, usually over 25 years, until the mortgage is paid off. You pay the same interest to the mortgage company even if you have money in savings accounts or money in your bank current account. In such a situation you might pay 7% interest on your mortgage, receive 5% interest on your savings account (reduced by tax to 4%) and no interest on your current account.
When you start the account, you will be given a credit limit which is usually the amount you need to borrow to buy a home - or pay off your existing mortgage. If you don't need all the amount you have borrowed, you don't have to. You can draw up to the credit limit again when you feel like.
So suppose your mortgage is £80,000, you like to keep savings of £10,000 and your bank current account balance averages £2,000. You pay interest of 7% a year on the £80,000 which is £5,600. You receive interest after tax on the savings of £400 and you receive no interest on your current account. So you have to pay out £5,600 less £400 which is £5,200 a year.
With the Offset Mortgage you are charged interest on the net amount - ie £80,000 less £10,000 less £2,000 which is £68,000 which at 7% comes to £4,760 a year - so the cost is £440 a year less. You also have the convenience that if you get a windfall, you can just reduce your mortgage and cut your interest charges. If later, you want to spend the money - say on a roof conversion, you just draw the money out a again. The only requirement is that you must repay the mortgage by the time you retire or by the end of the agreed term.
There are now a lot of banks which offer this type of mortgage but if you are saitsified with your existing bank, it might be simpler to transfer to a scheme run by that bank. For a list of "best buy" Offset Mortgages click here. Most large banks including Barclays, Lloyds TSB, Nat West, HSBC and Royal Bank of Scotland offer these arrangements either directlly or throygh a susbidiary.
Investing to buy a home
Mortgages continue to be easy to get and interest rates on both fixed and variable rate mortgages remain cheaper than for many years. House prices have also risen, especially in London and the South East. Forced sales where borrowers can no longer afford to pay their mortgages are much rarer.
You will need to have money readily available to pay a deposit - usually 10% of the purchase price but on higher priced houses often 5% is given. Keep the deposit money in a Bank and Building Society Postal or Phone Account or Bank and Building Society Internet Savings Account.
Offshore Bank Instant Access Account has the advantage that the banks are more used to moving amounts over £10,000 at short notice by electronic transfer (the fee is generally £20) and the money is credited on the same day. There is no bother of waiting for a cheque to get lost in the post and then to clear). This is ideal for sending the deposit or completion money to your solicitor's bank account.
Investing towards a mortgage is best done monthly. An amount to aim for are the payments you expect on your mortgage.
Save to buy a home with:
Bank and Building Society Monthly Saver
Account
Bank and Building Society Internet
Savings Account
Bank and Building Society
Postal or Phone Account
Offshore Bank Instant
Access Account
Investing towards a family
A young couple who are both working need to invest as much as possible if they want to start a family. It's very important that this money is not tied up: five years should be the maximum.
Invest towards a family with:
Bank and Building Society Monthly Saver
Account
Bank and Building Society Internet
Savings Account
Bank
and Building Society Postal or Phone Account
Investing for holidays
Investing for holidays is usually very short term. Most people will want to go on holiday once a year and if you go abroad it's likely to be quite costly: £2,000 plus for a family of four might be a typical figure. You will know from last year how much your next holiday is likely to cost you. Most years you can add on a bit for inflation and add or deduct from the cost depending on whether the pound is weak or strong. Unless you are investment for that special big holiday, there is not much point in committing yourself to a regular monthly saving.
Several building societies offer discounts or 'free' spending money on inclusive holidays or air fares booked by customers of certain accounts. This is equivalent to a discount of about 5%. Similar schemes are run for credit card holders like Access and Barclaycard.
Invest for a holiday with:
Bank and Building Society Postal Account
Bank and Building Society Monthly Saver Account
Bank and Building Society Instant Access Account
Bank and Building Society 30 Day Notice Account
You might also consider for spending money:
Bank and Offshore Bank Foreign Currency
Account
Offshore Single Foreign Currency
Fund
Bank Cash Card Account (Euros or
US$)
Investing for a car
Cars wear out. So if you can afford to, it's as well to put aside a regular amount towards the deposit on a new one. If you can't pay cash, the cheapest way to borrow is from a building society; hire purchase or a loan from a bank will always be more costly. On a new car a bank or building society may require you to put up 10% to 20% in cash. Occasionally you are offered interest-free hire purchase instead of a discount for cash. If you don't have the cash, it's well worth taking. Invest for a car with:
Bank and Building Society Postal Account
Bank and Building Society Monthly Saver Account
Bank and Building Society 30 Day Notice
Account
 Last updated 8 April 2008 |
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