Reflections: Opera, Middle-Age, and Planting the Seed

by Magical Penny on May 31, 2010

preparing the roadCelebrating a birthday is always, for me, a time to reflect.

A time to think about what I’ve been up to over the last year.

What I want to achieve for the year ahead; things I want to do before I’m 30 (now 6 years away!); and what I want to achieve before I die.

Thinking back over the the last year, it certainly has been a blast.

  • As a market researcher I’ve learnt a lot and have been discovering what direction I want to move towards in my career.
  • As a singer I’ve continued to meet some amazing people, experienced some wonderful moments, and even went out of my comfort zone to play a part in an opera.
  • And of course there’s Magical Penny. I can hardly reflect too much on it as it is only the blog’s 4 month anniversary but it’s had a profound effect on my life already:
  • Firstly, thank you for reading this and sharing in the journey. I sincerely hope that the words I publish here become something more: I hope the words have been transformed to actual pennies in your piggy-bank (and soon, an investing account!).
  • Secondly, if you don’t already have a blog I highly recommend it (and I’m happy to give you any tips on that front too!).

Despite the achievements and the experiences ticked-off on the score-card of life, every passing year seems to go by faster.

We’ll be 30 soon, then 40.

And if we’re lucky we’ll get to the dizzying heights of middle-age and beyond!

As each birthday comes and goes I feel glad that I started saving for retirement.

This birthday has been no different.

It made me think back to when I was a student, when I was first reading about the need to get started early. I didn’t have much money at the time but I understood in that moment exactly what I needed to do even if I didn’t know precisely how to actually get there: I needed to plant a money seed as soon as I was able, and give it time to grow.

Had I not come across those early personal finance blogs I could have quite easily continued into a ‘normal’ life of spending exactly what you earn (or more) and not start thinking about putting something away for retirement until I started finding my first few grey hairs around my temple.

I’ve never been a wreckless spender but I could easily have missed out on the profound message of living like no-one else (below your means) so later you can live like no-one else. Thankfully, learning about investing and beginning with small but regular saving has set me on a path that I’m happy with.

Of course, none of my happy reflections over the past year have anything to do with my bank account balance.

It never should.

The trick is to make your life shape your bank account balance, and not to let your bank account balance shape your life.

It’s hard to master and I’m still finding that balance but it’s good to reflect on where you’re at once in a while.

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Should I Invest Using Pre-Tax or Post-Tax Money?

by Magical Penny on May 28, 2010

Today’s an exciting day for Magical Penny as it’s the launch of the very first Magical Penny Video!

Pre Tax and Post Tax Investing -Which is better?

In the video I outline the pros and cons of saving using Pre-tax and Post-tax money.

Pre-tax savings

Pre-tax savings means saving in a pension or 401k and involves your money being fed directly from your employer into a savings vehicle without paying any income tax -you pay tax only when you come to take it out once you retire according to tax tools such as a tax estimator.

Post-tax savings

Post-tax savings means saving with your money that you ‘bring home’ -the money you find in your paycheck. If you then invest that in a savings vehicle like an ISA (or a Roth IRA if you’re in the US) then you get to keep all the gains and don’t have to pay any more tax.

My Conclusion?

…you’ll have to watch the video for the details but suffice to say it’s a typical personal finance blogger answer I’m afraid: You need to do a bit of both!

Your Thoughts?

From my perspective the video was a fun experiment but what do you think? Do you think I should do more videos or stick to writing? I’d love to hear from you -both on your perspective on pre and post-tax saving, and on what you think of the video format!

Production Notes

Yes I know I look a bit squashed in the video -the mp4 conversion to a format compatible with Windows Movie-Maker was not pretty (currently my only editing tool) -but for my first ever attempt at making a video I’m pretty proud of the result.

Have a great weekend all -I certainly intend to as I celebrate my 24th birthday 🙂

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How to Rock Your Finances Whilst Sleeping

by Magical Penny on May 26, 2010

Inevitably, from time to time,  life gets busy or you have days where you feel unwell (or even both!).
Such days may send you off-track,and mean you risk missing your goals or not following through with your intentions.

Your finances can also come under-fire occasionally:

  • There are times when you are too tired to cook so you order a takeaway.
  • There are times when a bike puncture means you opt for a taxi.
  • And there are times when you simply spend a bit too much money in starbucks!

Life doesn’t always go to plan so neither does a budget (!) but there is a solution of sorts:

Automation!

If you do this then…

  • You still may have months where you spend more than you intend but you’ll always have that automated transfer into your savings account.
  • You may not feel up for saving money but you know you’ve automatically invested a portion of your earnings into the market for the future.
  • You might not have the energy to research the best places to grow your pennies but you know you made some educated choices at the start of the year and now you don’t have to worry about the ups and downs of the market day to day. You can concentrate on getting some rest!

In case you’ve not figured this out yet, these examples are all related to me over the last couple of days.

I’m sure, however, you can all relate to them and I hope that, if you haven’t already, you decide to automate some positive financial choices so you reach your goals (hopefully) regardless of your every-day situation.

Happy Wednesday! 🙂

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Is Thinking About Money Bad?

by Magical Penny on May 24, 2010

Welcome Carnival of Personal Finance Blog readers. My “Should I Invest Using Pre-Tax or Post-Tax Money?” post is here (sorry for any confusion!).

On Saturday a friend of mine and reader of Magical Penny told me that I think about money too much.

I couldn’t argue with him because he’s right: I do think about money a lot.

Afterall, I write a blog about money management and investing (!).

However I wanted to explore the idea because there’s a misconception, amongst some, that thinking about money and aspiring for riches is a bad thing.

“Thinking about Money”

While my friend is right to say I think about money more than most, this misses the point. I think everyone should think more about their money and how to grow it to riches –but not as an end in itself.

Thinking about growing your money “just because” can lead to greed and emptiness, and no-one wants that.

But instead, you should be growing your pennies for loftier goals: to ultimately make a positive change in the world.

Hanse Selye put it well when he cautioned about money as an end rather than a means:

“A clear distinction must be made between our final aims  -the ultimate achievements that give purpose to life – and the means through which we hope to achieve them. For example, money is never a final aim; it has no value in itself. It can only act as a means, helping us to reach some ultimate goal which, to us, has inherent value”

So when I think about money it is not wrong because it will help me achieve my long term non-monetary goals:  money acts only as an enabling tool.

Money Don’t Equal Happiness but…

Certainly money isn’t required for happiness, but Ihave made the conscious choice that eventually I will have enough money (to have accumulated enough ‘value’) to:

  • continue having an exciting life indefinitely
  • to not be reliant on other people’s generosity or government subsidy when I can’t create income;
  • to make a positive monetary difference to projects close to my heart.

I also realise that small savings now can have a huge impact over the long term. To me it’s a really simple decision: not to spend as much now while I’m young, to enable a more abundant future.

Earl Nightingale in “The Strangest Secret”, is famous for saying that:

“men become what they think about.”

And how:

“success is the progressive realisation of a worthy ideal”.

I understand that I could so easily wake up 40 years from now and not be where I want to be. Life happens so fast, so in order to make sure I achieve these goals I obviously need to think about how I am going to make it happen.

How about you?

What do you think about every day? Are you making positive steps towards any of your goals on a consistant basis?

Ultimately “Thinking about money” is just one positive part of your personal development if you wish  to build and create the best life you can:  A life full of options, flexibility and freedom.

And it really is possible, especially if you start early!

If you can spare 30 minutes today I highly recommend you listen to Earl Nightingale’s speech: “The Strangest Secret” from the 1950s.  It’s audio-only so just click the link or watch below and listen while you’re at your computer doing whatever you’re doing.

I guarantee you’ll get something out of it (and he has the most fantastic voice too!)

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The Dangers of a Growing Bank Account

by Magical Penny on May 21, 2010

How’s your saving rate?

If you have been reading Magical Penny for a while I hope you have begun to grow your savings. If you have, then well done! However you still need to be careful you don’t start rationalising the idea of spending those savings as it’s all too easy to do!

Once you begin saving for the long term and investing it can be tempting to see your account balances as simply an extension of your normal short term savings and current account.

You may even start thinking things like:

“I could use my investments to buy a house”

“I could use my investments to go on a Caribbean holiday –it would be a great investment…for my sanity”

“I could sell my investments if I ever lost my job”

Depending on your perspective these could all be quite reasonable assumptions. However this can also be dangerous thinking that stops you from truly growing your pennies consistently over the long term:

State of Flux

When you invest you convert money into something else and whilst your investments are still part of your ‘networth’ their value is in a state of flux and can’t be relied upon like a savings account.

Having plenty of investments certainly is a cushion from financial disaster but it shouldn’t be your main strategy to prepare yourself for the worse. Your investments may not be worth what you need if you need to sell in a hurry. Instead, listen to the rallying cry of the personal finance blogger: “keep cash around”.

Losing Momentum

You may feel you’ll invest for a little while and then cash out when you’re ready to buy a house or other  big purchase. This can certainly be a good strategy for some and has allowed a friend of mine to buy a bigger house than they otherwise could have afforded. However, if you are serious about saving for the long-term and not just saving for what might come around the corner, you should not be cashing out your investments entirely.

You may feel you could use the money to help you achieve more pressing goals but you run the risk of losing the psychological game of your ‘saving momentum’.  What I mean by this is that no one enjoys starting again at £0. It might even discourage you from starting saving again.

By all means save for multiple goals but keep some of your investments separate in your mind –consider your ‘long-term’ savings ‘untouchable’ and it will help you keep your ‘saving momentum’ -it certainly helps me to I know I have some pennies invested that I will not be touching for decades. It helps me stay focused.

Human Beings aren’t good with big numbers!

Another danger of a growing savings balance is that humans aren’t really good with numbers.

For example if you had to imagine what a million tennis balls looked like you would probably do a bad job at estimating what they would look like.

The same idea is true when it comes to bank accounts and money in general.

As the numbers grow in your accounts and investments there is a risk that each penny become less meaningful to you: Either you stop giving your savings the attention they deserve or worse: you may think you can afford to take an increasing amount of money out of your savings or investments because as your savings grow, a small withdrawal becomes less and less as a percentage of the total balance. Don’t lose perspective on your money.

To sum up:

You may think an increasing bank account isn’t a problem (or it’s a nice problem to have) but alas the human mind can play tricks on your perspective and you may forget how hard it was to grow those pennies in the first place and for most people, it’s all too easy to spend.

For  most of us in our 20s and 30s, our savings and investments are pretty minimal at the moment but I hope you’ll keep these dangers in mind as you begin growing your savings for your long-term plans.

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Lessons from Watching My Investments Drop in Half

by Magical Penny on May 19, 2010

stock market can be like a yoyoThe Stock market can be a strange thing:

It can shoot up.

It can collapse.

And the Yo-Yo movement can make it seem to be acting completely crazy sometimes.

But when you have the right mindset and stick with a well thought-out plan it can be a tremendous wealth builder over the long term, growing your pennies into a stockpile for a future time, like collecting wood for winter.

One of the great things about a blog on personal finance is the chance to share a personal perspective on money-matters so I thought it worthwhile to share a real example of how understanding risk helped me grow my pennies in one of the craziest periods the market has ever seen.

I hope that by sharing this example you will have a better understanding of investment risk.

A Real-Life Example: Watching my investments drop in half.

I set out to grow my pennies initially by concentrating on simple index funds. I knew there were a million and one ways to invest in the stock market but sticking with an index fund (an investment than includes every stock in a ‘index’ like the FTSE in my case) would be a good start (more on this in future posts)

Of course, knowing I had such a long time horizon I began getting more curious about investments further away from home: particularly the mythical ‘emerging markets’ –investing in countries with economies that are set to grow in the future: like Brazil, Russia, India, and China (known as the BRIC economies).

After doing a bit of reading I decided to buy some units in a fund that focused on buying shares in companies in South America, primarily Brazil.

This was the beginning of 2008 before the full extent of the credit crunch was known so I had a huge surprise when, only days after making my initial investment, my investment valuations went into freefall!

Myth: Diversification avoids all investment risk.

Investing in a fund containing lots of different stocks and shares is much less risky than investing in only a few single shares, but it is still risky because stocks and shares in whole industries and countries can go down together.

You therefore need to make sure that before you make any investment that you think not only about diversification (how deep you go into stocks in terms of the range of investments) but also about asset allocation (how you spread your pennies across a range of assets –like cash, stocks, and bonds).

Asset Allocation is Important: For 20 and 30s somethings it means: Have you enough cash?

Thankfully I had  already made sure my asset allocation was set –I had plenty of cash savings which helped me  not to panic when my ‘emerging markets’ investment almost halved in a matter of months.

By the end of 2008 my my investment was down 50% (rather than the Year end figure of -40% above because I had invested almost right at the top, part-way through the year).

Those of us in our 20s and 30s can be much more ‘risky’ with our investments if we are investing money we won’t need for a long time –we can therefore give our money a chance to grow over the long term (with the possibility of significantly higher growth rates compared with a  savings account).

Ultimately having a long term view and a good asset allocation has helped my investments to do well so far – as you can see I decided to buy even more shares at a lower price so as of now, my ‘emerging market’s investment has done very well for me.

Remember though, this could have been disastrous if I had needed to sell during 2008. In fact for many older people, the craziness of the stock market in 2008 was indeed disastrous to their life savings.

Lessons To Remember

My experiences in this investment also taught me an important lesson about asset allocation and greed.

  • When you begin building momentum with your savings it can be tempting to invest as much as possible. However if I had been greedy and put all my money into investments at start of 2008 I would not have been able to invest much more money after the slump, nor would I have been able to touch that money in the event of an emergency without losing a huge amount.
  • Being young certainly means we can take on more ‘risk’ but you have to be disciplined and rational about your long term plan if you want to be successful with your investing. Asset Allocation is just as important as diversification i.e. –prepare to spread your money around investments but keep cash on hand too!

It’s worth it though: from a long term perspective, as companies create value every day, stock market indices have always performed like someone playing with a yo-yo whilst walking up the stairs:

Up and down, up and down, but over time, you end up much higher than where you began.

Are you ready to begin the climb?

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The Risks of Risk (Understanding Risk Part 3)

by Magical Penny on May 17, 2010

In Part 1 and Part 2 of the ‘Understanding Risks’, we looked at how risk is really just the range of possible values at any point in time and how having a long-term horizon takes the real risk out of investing.

Investing, when done with a long-term outlook and with diversification -spreading your money around you help lower your risk of losing it all –is not as ‘risky’ as you may think.

In fact, the opportunity cost of not investing should be more scary to you by now (assuming you have read all the Magical Penny posts on investing so far!).

However, I’m not going to make any promises that investing is fool-proof.

The Risks of Taking Risk

You don’t need to dedicate all your waking hours to the subject of investing but you do need to be aware of the risks of taking ‘risk’ with your pennies. Here are the two main risks for someone in their 20s and 30s who are just starting out:

  • Not really having a long time horizon
  • Feeling greedy and taking excessive risk

You May Not Have a Long-time Horizon

The first risk of taking risk is about your time horizon. A long term view is important because when you invest in the stock market the value of your investment will fluctuate over time. The day-to-day price only becomes important when you need to sell; hopefully many years from now.

However, life doesn’t always go to plan and you may need money for an emergency or simply something you *really really want*. If you let your situation or emotions control your monetary needs you could find yourself selling your investments. This could be devastating on two fronts:

  1. You could be selling at a time when your investments have fluctuated down in value and may lose money. Bad times.
  2. You are forgetting why you wanted to invest in the first place: to help grow your pennies long-term. Spending your investments in the present means you lose momentum on your savings goals and you may find it harder to start building up your savings again.

The Solution

The solution is to make sure your investments really are for the long term by having enough savings in cash to both help you through emergencies and allow you buy the things in your life that are important to you without resorting to cashing in your investments.

Feeling Greedy and Taking Excessive Risk

The second ‘risk of taking risk’ for new investors is being too greedy.

I’m sure you’ve heard stories about someone who invested only a small amount in a company stock that then grew by 500%, thus securing their financial freedom.

Or the ‘tip’ to put all your money in China because it’s a country experiencing huge amounts of growth.

But remember what risk really is: the possible range of return over a certain period time due to the level of unknown factors.

For example…

China is considered risky because we, as investors, do not know how China’s economy will perform in the coming years –there’s potential for huge growth, but equally there’s potential for corruption, unknown problems and underperformance compared with expectations.  You therefore need to balance your portfolio so if the value of investments in Chinese companies fell to the low end of possible values you would not be in too much trouble because you have other investments.

The Solution

When you begin investming you’ll need to avoid to being taken over by greed by diversifying your investments (investing in lots of different places). Yes, you will not get as good a return as if you had only put your pennies in a few amazing investments, but you will have saved yourself from the risk of losing your pennies if those investments don’t return what you expect.

It’s easier said than done but Magical Penny is here to help you navigate the options.

Before we do, look out for Wednesday’s post where I’ll share a real-life example of how I dealt with trying to avoid greed whilst taking advantage of having a long-term horizon, resulting in being able to double my invested pennies in only a few months.

Further Reading

‘Buy and Hold’ is the Magical Penny investing strategy of choice. However, I found this counter-argument a fascinating read and very topical given the current series of posts on investment risk:

  • The Risks of Buy and Hold Investing

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Investment Risk: A long term view

by Magical Penny on May 14, 2010

Part 2 of the Magical Penny series on Investment risk. Today we’re looking at the importance of a long-term horizon to take advantage of investment risk. Part 1 is here.

The biggest difference between saving in a savings account and investing in the stock market is when you go to check your account once a month the balance could be lower than what you put in!

This is a serious sticking point that puts people off investing but a fluctuating value is an integral part of what investing is about: you are putting your money into businesses that are constantly reacting to a changing world so valuations inevitably change too.

In reality even your money in a savings account is fluctuating in value: The only difference is you do not see the fluctuations as the bank smoothes it over to give you the illusion that all your money is there -it’s why a bank would not be able to pay out all the money in all the savings accounts at the same time -because bank assets are invested and fluctuate in value.

Whilst the idea of losing some of your invested pennies is a legitimate fear, you should still be learning about investing and eventually start investing yourself to take advantage of a long-term investing horizon:

cautionAs you learn more it may be tempting to try to make some quick money in the short term using the stock market. However it’s not recommended unless you have a huge amount of time and money to practice and trade with. You won’t find anything helpful here on Magical Penny on this subject.

Think Long Term

A long term horizon means you are investing for the distant future, like retirement, a dream home or anything you may want many years from now.  That said, whilst it seems far away, it will come quicker than you think (so I’m reliably informed) so starting early is good!

Time Heals…

For most of us in our 20s and 30s we have a long time to grow our pennies so it shouldn’t mean much whether the FTSE100 (Financial Times Stock Exchange: a collective term for top 100 number of shares on the London Stock Exchange) or any other index or share is going up this week or going down. In fact, by investing long term (through a buy and hold strategy) it’s not important (nor recommended!) to keep track of every movement  in value every day.

By investing with a long-term view we can  take more ‘risk’ –giving us a greater range of possible values for our savings. And as we have so much time, our money has time to grow because business valuations tend to go up over time (depending on the time period of course but that’s another blog post!). Starting early and taking advantage of a long time horizon can therefore be absolute magic for growing our pennies.

Trick of the Mind

It’s easy to write that “valuations in the short-term don’t matter”, but it’s a completely different thing to put £1000 of your hard-earned savings in the market and look back a few months later and see that it’s down to £700! (or even worse like the time when my £1500 investment halved in value over only a few months).

It’s hard to tell how you will feel until you experience the apparent loss of your money yourself, but remember, you should only be investing pennies that you don’t need for over 5 years so when it looks like your investment has gone down in value, it doesn’t matter because that loss is not ‘real’ until you sell –something you won’t need to do for many more years.

The Take-Home Point:

A long-term horizon can really help you grow your pennies because not only do your pennies have time to grow into substantial sums (as you are investing in value-creating businesses through the stock market),  but the market value fluctuations can be mostly ignored as they are meaningless if you are decades away from when you intend to sell -something to keep in mind not only when your investments are down but when they double and triple in value.

Now there’s a happy thought to ponder over the weekend!

Is there anything else that’s putting you off from investing?

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Understanding Risk

by Magical Penny on May 12, 2010

This is part 1 of ‘Understanding Risk’: There’s so much to discuss I’ve decided to split this post up into several parts.

When you first start reading about  ‘investing’ you’re going to come across the word ‘Risk’ a lot. It’s a concept that is easy to understand on the surface but to fully understand the concept and the implications for growing your pennies over the long term takes a little more time.

Are you intimidated by the stock market?

Risk is one of the main reasons why people think investing is scary (or believe it is downright dangerous!).

The dictionary definition doesn’t help matters either:

noun

1 a situation involving exposure to danger.

2 the possibility that something unpleasant will happen.

However, when it comes to investment risk, it helps to think of risk as merely a range of possible values at any point in time:

  • A high risk £10 investment could grow to £20 or go down to £5.
  • A lower risk £10 investment could grow to £15  or go down to £7.
  • A ‘No risk’ investment could grow to £12, but not fall to less than the original £10

A more extreme case could be a £1 lottery ticket: an extremely high risk item with an extreme range of possible outcomes: it could be worth £1 million or it could be worthless.

Why some investments are more ‘risky’ than others

Investment risk is more about unknowns than actual ‘danger’ (unless you are investing money that is vital to you –something you should never do). Think about the lottery ticket: people are willing to pay £1 for a likely worthless ticket because they don’t know its true value.

Incidentally, loans are a form of risk too. For example, when taking out online payday loans make sure you have the means to steadily pay it back. Loans are meant to help you stretch your assets- not replace them.

Risk-Free

In contrast: for a savings account, everything is known: the bank makes a promise to pay you a certain interest rate and promises you that your account balance will not go down. The range of values that your account could ever be is small because everything is known –you know you will not lose money, and the bank knows they only have to pay you a certain interest rate.

High Risk

 

 

Compare this to a more ‘risky’ investment, perhaps a share in a small oil company. Investing in individual shares is ‘high risk’ because there is a huge range of possible values of that share at any one time –the company might do well, perhaps find some oil in the Atlantic ocean, and so the share price may go up dramatically. However, the company could use all its money drilling for oil and not find anything, resulting in the share price falling dramatically.

Balancing Risk

Therefore, the trick to successful investing is finding the right balance of risk for your pennies: you could decide to be very risky and become very rich very quickly, or you could lose your money just as quickly.

Or you could decide to do the opposite and avoid taking risks with your money. However this decision is dangerous in its own right as your money loses value due to inflation – it may be a less obvious danger, but if you do not take enough risk with your pennies they may be worth less over time.

Risk is therefore definitely worth getting your head around if you are to grow your pennies successfully.

There’s lots to cover  but when it comes to investing the number one rule about risk is: High Risk does not always mean High Reward, only the potential for a high reward.

Lottery ticket anyone? 😉

In Part 2 on Friday we’ll look at the benefits and pitfalls when it comes to investment risk.

Midweek Reading:

From around the web:

  • Festival of Frugality #278: The Pure Peer Pressure Edition
  • Carnival of Personal Finance #256: Market Crash Edition
  • 5 Reasons Why I’m a Student of Life, and You Should Be Too

Related Magical Penny Posts:

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Breaking the ISA – an introduction to ISAs

by Magical Penny on May 10, 2010

Magical Penny is proud to host this guest-post to help you understand  UK-specific ‘Individual Savings Accounts’, more popularly known as ISAs.

The humble ISA has become more popular in recent years, more so when the base rate dropped to a record low back in March 2009. But how much do any of us really know about ISAs? Do you just see them as a fancy version of savings account, or as the sound investment opportunity they are?

There are essentially two types of ISA. One deals purely with cash deposits and is therefore appropriately named the ‘cash-only ISA’. The other, which I’ll go into more detail about a little later, holds assets such as shares, bonds and equities as well.

The Cash ISA

The cash ISA is perhaps the easiest one to understand as it works similar to a regular savings account. The pros and cons of a cash ISA are outlined below:

+ Can carry a higher rate of interest than a regular account. A typical interest rate on a cash ISA can be between 1% and 4.75%.
+ The money contained within, and interest earned, is tax exempt so you keep all the money you’ve saved.
+ Can prevent impulse buying as in some cases notice needs to be given to the bank before withdrawing your cash.

– With some ISA accounts money is locked away for a fixed period of time, so may not be suitable for short-term saving goals.
– Can only deposit up to £5,100 per financial year. If you wish to save more look at a stocks and shares ISA instead.
– Cannot ‘top up’ during the year if you withdraw early. The £5,100 is the maximum you can deposit in one year, regardless of how much you later withdraw.

The Stocks and Shares ISA

Unlike the cash ISA, the stocks and shares ISA allows you to hold assets as well as money, and has a higher deposit limit of £10,200. Some of the pros and cons of stocks and shares ISAs are listed below:

+ If you’re a higher-rate tax payer, a stocks and shares ISA will allow you to pay less tax on your savings. Typically you would only pay 10% on the interest as opposed to the 40% a higher-rate tax payer would be liable for.
+ If you hold shares or bonds, you can link them to a stocks and shares ISA, meaning any money you make on them would only be liable for the lower rate of tax.
+ As stocks and shares ISAs typically have longer fixed terms, the interest rates tend to be higher than on cash ISAs.

– The stocks and shares ISA isn’t suitable for small amounts or short-term investments. If you plan on selling your assets relatively quickly, don’t keep them in this type of ISA as you won’t realise the rewards.
– Investing in any type of asset can be risky as the market fluctuates. After your ISA period has ended your return may not be as much as you expected or you could potentially lose your initial investment.

With both types of ISA, there are risks and rewards. As interest rates rise and fall, so will the interest you earn on your savings. Some banks will have a minimum deposit of £1000 to open up an account, but others can set one up for as little as £1. You may need to be an existing customer of the bank before you can open an ISA with them.

An ISA can be an excellent way of providing for your future, much like a pension. If necessary, seek financial advice from a professional before investing in stocks and shares.

Louise Tillotson is a financial author with UK comparison site moneysupermarket.com.



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