Saving for the future

With so many demands on our finances, it's no surprise many of us struggle to plan beyond the next pay cheque.

If we're saving at all, it's probably for something short-term like a holiday or a new car. But it's a good idea to do some longer-term saving too, in case of emergencies and to provide for your future lifestyle. Take 10 minutes to check out your options.

Before you begin: Carry out a personal audit
Saving is a balancing act between having enough to live on comfortably now, and putting aside enough to keep it that way in the future. So take a good look at your finances. Do you have any savings or investments? What do you owe on your mortgage, credit and store cards, personal loans, etc? Taking into account your monthly income and outgoings, how much can you afford realistically to invest for the future?

Step 1: Pay off your more expensive debts first
If you have expensive debts, particularly on credit or store cards, target these before you think about saving. The interest you're paying on these debts is likely to be far higher than the interest on money you'd invest.

With credit card debt, try switching to a card that offers an interest-free period for balance transfers (though beware of switching charges) and aim to pay off the debt within this timescale.

Step 2: Think about your goals
Do you want to save for something in the near future (a holiday or a new car) or are you thinking long term; 10, 15, even 20 years down the line? How much risk (if any) are you prepared to take with your money?

Step 3: Think about access to savings
Typically, the longer you tie up your cash, and the longer the notice period you're prepared to give to access it, the better the rate of return will be.

If you are saving for a specific event such as a wedding, holiday, or even retirement, consider tying your money up completely until it's needed.

But if you want a nest egg you can dip into in case of emergency, then you'll want an account with greater access - if not instantly, at least in a month or two.

Step 4: Consider your tax position
Whether you are a basic, higher rate or non-taxpayer affects which savings options are most suitable for you. For example, there is no point in opening an ISA to avoid tax if you are a non-taxpayer.

Similarly, investments that are non-taxable such as National Savings Certificates will be worth proportionately more to higher rate taxpayers than to basic or non-taxpayers.

Step 5: Consider your options

Savings accounts
A simple deposit account with a bank or building society offers safety and flexibility. Interest will be added regularly (usually monthly or annually). You can add or withdraw money as you like (sometimes after a notice period). Basic rate tax is generally deducted at source. If you are a non-taxpayer, ask for the form that gets your interest paid to you gross.

Individual Savings Accounts (ISAs)
A tax-free investment that all taxpayers should take advantage of. Anyone over 16 can invest up to £3,000 cash every tax year into a mini cash ISA; all the interest is tax-free. Many cash ISAs are instant access, but beware, you cannot in the same tax year invest £3,000, withdraw some because you need the money, and then put it back.

NS&I (formerly National Savings)
NS&I offers a range of safe investments, including deposit accounts, savings certificates, and bonds. Some are tax-efficient, particularly for higher-rate taxpayers.

Stock market-based investments
More sophisticated investors might consider direct investment in stocks and shares. You can dip your toe in the water with a 'pooled investment' such as a unit trust, investment trust or OEIC, some of which can be placed in an ISA 'wrapper' up to a maximum investment of £7,000 in any tax year (£4000 if you already have the maximum in a mini cash ISA). Some investment bonds are also linked to the stock market.

Remember: all stock market-based investments carry risk. They can go down as well as up in value, so if you are not prepared for this possibility steer clear.

Step 6: Mix it up
Don't put all your eggs in one basket. Cash will be safe in a deposit account with a mainstream financial institution, but if you have a significant amount to save, it's always best to use a range of options.

Step 7: Seek advice
If in doubt, seek some expert advice from an independent financial adviser.