Choosing Savings and Investments

How to Choose Savings and Investments

You need to consider a combination of factors when thinking about which type of savings or investments will best meet your needs.

How much can you save or invest and how regularly?

With most savings and investments, there is a minimum amount you can invest.

Sometimes, where there is no minimum amount, charges still make it uneconomical to pay in small sums. Where a type of saving or investment enjoys favorable tax treatment, there is usually a maximum you can invest. This can apply to other products too.

Regular and/or annual savings

Certain investment products are specifically designed to accept regular monthly or annual savings, and there may be penalties if you fail to keep up the payments. There is quite a debate, especially in the insurance and pensions world, over whether regular saving is a `good thing’.

Regular saving has the advantage of creating a discipline which you might find helpful. It also takes away tricky decisions about when is the right time to buy investments whose price rises and falls.

On the other hand, by committing yourself to regular saving, you lose flexibility over what, when and with whom you invest, because you are locked into the savings arrangement. This can be a problem if either your circumstances change or better products come on to the market.

Pension products

It is also commonly argued that charges from regular savings insurance and pensions products are higher than for equivalent single-premium products (where you pay in a single lump sum).

On the face of it, this is true. However, you must consider how you would use single-premium products. The alternative to taking out a regular-premium plan would be to take out a series of single-premium plans as and when you could afford to, you must compare charges for the entire series of lump-sum plans against the charges for the regular savings plan.

For how long can you tie up your money?

Of critical significance when choosing any investment is: when can you get your money back and are there penalties for doing so? Some products are designed to last for a specific period, e.g., 5-10 years, for example. Of course, you should not invest unless you can leave your money for the full period.

Other investments do not have a specified term, but they may clearly be best suited to long-term investment and maybe an unwise choice if you know you want to save only for a year or two or might need funds in a hurry.

However sensibly you choose your investments at the outset, life can be unpredictable, so you should check what happens if you need your money back sooner. You simply may not be able to have it back, perhaps you would lose interest, there might be surrender charges or, with an investment whose price rises and falls, you might run the risk of a loss.