Wednesday, 30 September 2009

Savings - different purposes - saving to spend

Today, I'm tackling saving up to buy something in the future. For example, you may wish to save up to buy a car, or home improvements, or perhaps a wedding or holiday. I have also saved up for an occasional expensive item of clothing, and in one case a watch. I contend that these expensive purchases don't make me financially irresponsible; I didn't use credit to buy these items, but chose to save my personal spending money to buy them in place of a number of smaller, more forgettable, treats. (While saving up for the watch, I decided to forgo new clothes for several months in order to buy it; maybe a sign that my priorities are a little peculiar, but it worked for me.)

Anyway, my point is that if you want to buy something expensive, it is, in general, with some exceptions which I will tackle in future posts, more efficient to buy it with money you already have than to borrow the money to do so. And while you are assembling your cash, you may as well get some interest out of it.  You will probably want to keep the money somewhere accessible, although if you are planning fairly long-term for your purchase, you could sign up for an account with some notice attached, if that gets you a better rate.

My recommendation would be to consider the following: using your Cash ISA allowance if you are a taxpayer and have not already done so; using an offset facility on your mortgage if you have one; or, failing either of these, using an ordinary savings account with a good interest rate. Unless you are planning fifteen or twenty years ahead, I would not invest the money in anything stockmarket-related.

You might also consider buying some premium bonds with the money.  There are sites you can visit which show how to calculate the effective interest rate, and this may be worth considerable. I had quite a few bonds for a while, but wasn't lucky enough to win more than a very few small prizes, so I eventually decided to cash in all but a couple of them. (This was rather illogical of me as the more bonds you hold, the more likely you are to win, but after all I am not a computer!)

I suggest deciding to save a certain amount towards your goal each month, bearing in mind what you can afford and when you plan to buy the item, and setting up a direct debit to the designated account each month. If you have the chance to name the account to suit your goal, which is sometimes possible, that may help you.  As mentioned in a previous post, I use my mortgage offset account to save, and have recently set up a "car" jar, into which I will save a small monthly account towards the next car I expect to buy several years' from now. 

Finally, it may be that it is unrealistic to save the full amount you need for the purchase in question before the time you need the money, but even if you are able to send 20% or 30% of the money needed, that will reduce what you need to borrow, and therefore save interest, and will help you to get into the habit of planning ahead.

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