For most of us on modest salaries it takes careful planning and several years to accomplish that security and enjoy the freedom that comes with it.
October 18, 2006 (Press Release) --
There are three basic types of savings investment, and within each, three categories. What we call a balanced portfolio will have a mixture of all three, in differing proportions depending on your aims, your circumstances and your age. The three basic types are:
Cash
Cash is simply assets that are not tied up to anything or linked with anything. A share isn't cash because the money is linked to the share. A painting isn't cash because it's a physical thing. Cash isn't just notes and coins, but bank accounts, building society accounts and money held in trusts, and so on.
Part of anyone's financial mix should be in cash. It's the safest of the three, and the most readily available should you need it. However, with that convenience obviously comes lower returns. Again, there are three categories within cash:
Instant cash - such as current accounts and instant access savings accounts, are good for readily available cash. It's not worth having too much tied up here, though, because interest rates are very low.
Medium-term cash - all banks and building societies have accounts which pay a bit more interest than instant cash ones, but you may need to give seven days, one month or three months' notice to get at your cash. If you break the rules you lose that amount of interest but the money is still easy to get at.
Long-term cash - nothing held as cash should be too long term because there are better vehicles for your money than that, but you can buy one, two or five-year cash bonds which give a good return so long as you keep your money in there for the duration.
Bonds
Bonds are like IOUs from the Government or private companies and vary in risk. Basically, how a bond works is that you lend someone some money, say £100, and they promise to give you a certain rate on interest per year, for example, five per cent. At the end of an agreed period, you get your initial money back. If you sell the bond early, you may NOT get all your initial stake back.
Premium bonds follow the same principle of giving you your money back when you want it, but instead of paying you interest they offer you the chance to win prizes.
The safest bonds for British people are those issued by the Government. Whatever you may think of it, it's not going to go bust. The UK has the fourth largest economy in the world and 'gilts', as Government bonds are called, are deemed very safe. Millions of us have the simplest of these bonds in National Savings Bonds, though there are other types available, such as Treasury Bonds.
Private company bonds are simply IOUs issued by private limited companies. There are bonds in Marks & Spencer, Shell and most of the other FTSE companies. They're a useful way to invest for companies who want to raise cash. They're safer than shares, but if that company goes bust, you'll lose your money.
Bonds as a vehicle for smaller investors has grown in popularity in recent years, but apart from those safe National Savings ones you get from the Post Office, the rest need proper analysis and advice.
Shares
Shares are simply a way of giving you ownership of a company in exchange for your money. They're great investments if the company does well and the share price soars. It pays handsome dividends but, as we have seen in recent years, the price of shares can fall as well as rise. It's this uncertainty that make shares potentially the most rewarding vehicle for the general investor but also the most risky. That's why only a proportion of your portfolio should be held in shares and you should research which companies to buy with care.
Shares have two ways of generating wealth for you:
Capital increases. The price of the share goes up, you sell and get lots more money
Dividends. This is the income a company usually pays to its shareholders. You can either use the income as cash, or to put into other investments, or to re-plough into buying more shares in that company
Investment trusts
These are companies that you buy shares in that, instead of making products themselves, simply invest in other ones. This spreads your money across a wider portfolio of companies while retaining ownership of the company you have put your money in.
Unit trusts
A sub-section of shares are Unit Trusts and Open Ended Investment Trusts (OEICs). You don't own a share of the overlying trust, but you buy units in it, which are then used to invest in various things. This pools your assets with other investors. Generally speaking Unit Trusts and OEICs are slightly safer than shares. Each unit invests in several other areas. Therefore, the spread of the investment reduces the risk associated with investing in a single company.
Drip feeding
Most of us can't throw a few thousand at once at an investment we fancy, so many investment and unit trusts and OEICS allow you to 'drip feed' money into their fund each month. This makes it affordable, and spreads the risk. If the shares or units are low, you get to buy more of them for your £50. If they're high you obviously buy fewer of them. It's a good way to invest and also allows you to save regularly.
For both bonds and shares there are low, medium and higher risk options. For example, a share in a well-known oil company is relatively low risk but a share in a small company pursuing an uncertain market will be high risk. Within any portfolio, given considerations for age and circumstances, you might want a mixture of low medium and high risk. As a rule of thumb, the older you get, the bigger the proportion of your shares and bonds should be in the lower risk category and shares with more dividend income are better.
Endowments and insurance
Another way you can invest for the long term is to take out a policy. Insurance companies, and pension companies, have policies in a bewildering variety for your long-term financial planning.
These tend to be for periods of ten years or more. With all these investments, and the mix of them in your individual portfolio, you must seek advice. Independent financial advisers are a good source of information but ensure they really are independent and not tied to certain providers.
To keep things simple and if you don't mind being tied to one bank, you can get all your financial products from one place, but rarely will you get the best mix available.
Whatever advice you get, make sure you find out what's in it for the advisers. For example, ensure you find out what commission they're on.
Remortgaging
Finding out if your mortgage is really the best value is important, because if you have many years left to pay and you're paying too much, it adds up to thousands of pounds. There may be a cost in transferring your mortgage, such as new valuation fees, legal fees etc. but these will only be a few hundred pounds at worst, and the savings could be very worthwhile.
It's best to talk to an independent financial adviser before you take any action. Check there are no hidden penalty clauses with either your current mortgage provider or your new one.
To sum up
Having savings is a very important part of a financial plan. There should be a mixture of where you put your money, some in cash for the shorter term, and shares and bonds for the middle and longer term.
Each person is different and has different needs. A 25 year old can be riskier with money they won't need for 35 years, while a 40 year old with a five-year-old child will want something to pay for university in 13 years' time.
source: http://www.bbc.co.uk/
Cash
Cash is simply assets that are not tied up to anything or linked with anything. A share isn't cash because the money is linked to the share. A painting isn't cash because it's a physical thing. Cash isn't just notes and coins, but bank accounts, building society accounts and money held in trusts, and so on.
Part of anyone's financial mix should be in cash. It's the safest of the three, and the most readily available should you need it. However, with that convenience obviously comes lower returns. Again, there are three categories within cash:
Instant cash - such as current accounts and instant access savings accounts, are good for readily available cash. It's not worth having too much tied up here, though, because interest rates are very low.
Medium-term cash - all banks and building societies have accounts which pay a bit more interest than instant cash ones, but you may need to give seven days, one month or three months' notice to get at your cash. If you break the rules you lose that amount of interest but the money is still easy to get at.
Long-term cash - nothing held as cash should be too long term because there are better vehicles for your money than that, but you can buy one, two or five-year cash bonds which give a good return so long as you keep your money in there for the duration.
Bonds
Bonds are like IOUs from the Government or private companies and vary in risk. Basically, how a bond works is that you lend someone some money, say £100, and they promise to give you a certain rate on interest per year, for example, five per cent. At the end of an agreed period, you get your initial money back. If you sell the bond early, you may NOT get all your initial stake back.
Premium bonds follow the same principle of giving you your money back when you want it, but instead of paying you interest they offer you the chance to win prizes.
The safest bonds for British people are those issued by the Government. Whatever you may think of it, it's not going to go bust. The UK has the fourth largest economy in the world and 'gilts', as Government bonds are called, are deemed very safe. Millions of us have the simplest of these bonds in National Savings Bonds, though there are other types available, such as Treasury Bonds.
Private company bonds are simply IOUs issued by private limited companies. There are bonds in Marks & Spencer, Shell and most of the other FTSE companies. They're a useful way to invest for companies who want to raise cash. They're safer than shares, but if that company goes bust, you'll lose your money.
Bonds as a vehicle for smaller investors has grown in popularity in recent years, but apart from those safe National Savings ones you get from the Post Office, the rest need proper analysis and advice.
Shares
Shares are simply a way of giving you ownership of a company in exchange for your money. They're great investments if the company does well and the share price soars. It pays handsome dividends but, as we have seen in recent years, the price of shares can fall as well as rise. It's this uncertainty that make shares potentially the most rewarding vehicle for the general investor but also the most risky. That's why only a proportion of your portfolio should be held in shares and you should research which companies to buy with care.
Shares have two ways of generating wealth for you:
Capital increases. The price of the share goes up, you sell and get lots more money
Dividends. This is the income a company usually pays to its shareholders. You can either use the income as cash, or to put into other investments, or to re-plough into buying more shares in that company
Investment trusts
These are companies that you buy shares in that, instead of making products themselves, simply invest in other ones. This spreads your money across a wider portfolio of companies while retaining ownership of the company you have put your money in.
Unit trusts
A sub-section of shares are Unit Trusts and Open Ended Investment Trusts (OEICs). You don't own a share of the overlying trust, but you buy units in it, which are then used to invest in various things. This pools your assets with other investors. Generally speaking Unit Trusts and OEICs are slightly safer than shares. Each unit invests in several other areas. Therefore, the spread of the investment reduces the risk associated with investing in a single company.
Drip feeding
Most of us can't throw a few thousand at once at an investment we fancy, so many investment and unit trusts and OEICS allow you to 'drip feed' money into their fund each month. This makes it affordable, and spreads the risk. If the shares or units are low, you get to buy more of them for your £50. If they're high you obviously buy fewer of them. It's a good way to invest and also allows you to save regularly.
For both bonds and shares there are low, medium and higher risk options. For example, a share in a well-known oil company is relatively low risk but a share in a small company pursuing an uncertain market will be high risk. Within any portfolio, given considerations for age and circumstances, you might want a mixture of low medium and high risk. As a rule of thumb, the older you get, the bigger the proportion of your shares and bonds should be in the lower risk category and shares with more dividend income are better.
Endowments and insurance
Another way you can invest for the long term is to take out a policy. Insurance companies, and pension companies, have policies in a bewildering variety for your long-term financial planning.
These tend to be for periods of ten years or more. With all these investments, and the mix of them in your individual portfolio, you must seek advice. Independent financial advisers are a good source of information but ensure they really are independent and not tied to certain providers.
To keep things simple and if you don't mind being tied to one bank, you can get all your financial products from one place, but rarely will you get the best mix available.
Whatever advice you get, make sure you find out what's in it for the advisers. For example, ensure you find out what commission they're on.
Remortgaging
Finding out if your mortgage is really the best value is important, because if you have many years left to pay and you're paying too much, it adds up to thousands of pounds. There may be a cost in transferring your mortgage, such as new valuation fees, legal fees etc. but these will only be a few hundred pounds at worst, and the savings could be very worthwhile.
It's best to talk to an independent financial adviser before you take any action. Check there are no hidden penalty clauses with either your current mortgage provider or your new one.
To sum up
Having savings is a very important part of a financial plan. There should be a mixture of where you put your money, some in cash for the shorter term, and shares and bonds for the middle and longer term.
Each person is different and has different needs. A 25 year old can be riskier with money they won't need for 35 years, while a 40 year old with a five-year-old child will want something to pay for university in 13 years' time.
source: http://www.bbc.co.uk/
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