Putting some money aside for a rainy day, saving up for a house, pension or other significant life events may seem like an impossible task at first but it’s always worth the effort. Unfortunately, it appears that the majority of the UK?s working population has decided to take the easy route.
The UK?s savings ratio, the percentage of disposable income that is saved by households, declined to 3.8% during the fourth quarter of 2015 its lowest level for more than two decades. Ten years ago the savings ratio was close to 10% of disposable income. What?s more, gross household UK…
Putting some money aside for a rainy day, saving up for a house, pension or other significant life events may seem like an impossible task at first but it’s always worth the effort. Unfortunately, it appears that the majority of the UK’s working population has decided to take the easy route.
The UK’s savings ratio, the percentage of disposable income that is saved by households, declined to 3.8% during the fourth quarter of 2015 its lowest level for more than two decades. Ten years ago the savings ratio was close to 10% of disposable income. What’s more, gross household UK savings declined to a level not seen since the end of 2007 at the end of last year, around 60% below the peak printed at the end of 2010.
But saving doesn’t have to be a chore. Neither do savers have to worry about today’s low-interest rate environment. Indeed, by using a combination of a regular savings plan, the stock market and time, it’s not unreasonable to suggest that you could turn £50 a month into £10,000 within 10 years.
Slow and steady
Saving £50 a month won’t break the bank. On average this works out at around £1.65 a day, which is around half the price of a coffee in most high street coffee chains. To put it another way, £50 a month is £11.50 a week or around 1.5 hours work per week on the statutory living wage for 25-year-olds.
Putting aside just a small slither of your weekly earnings into a savings account is the first step to building up your financial reserve. However, with interest rates at rock-bottom levels, (and possibly set to drop further) traditional savings accounts may not be the best place to stash your cash.
The best way to grow wealth
The best ways to build your wealth over time is to invest, and for most savers, the best way to start investing in the market is via a low-cost FTSE 100 or FTSE 250 tracker.
When shopping around for the best investment accounts, it’s vital that you hunt for the best deal to minimise broker fees, which can be significantly detrimental to returns over time. The best offer on the market at present comes from TD Direct Investments.
TD offers a regular investment ISA, which doesn’t charge a management fee if you commit to investing a minimum of £25 every month, trading commissions fall to £1.50 per monthly trade. If you don’t invest on a regular basis it’s £12.50 to trade, and account management fees are £30 every six months. So, if you only trade twice a year account fees will amount to £85 per annum, compared to just £18 per annum if you invest monthly.
Look to the long term
Studies have shown that the average return from the stock market over a long-term time horizon is between 8% and 9% per annum. And according to my figures, if you invest £50 a month at an average growth rate of 9% per annum, reinvest the dividends and minimise costs, over 10 years this small monthly payout will grow to just under £10,000.
If you take this approach, saving really doesn’t have to be complicated.
The worst mistake you could make
According to a study conducted by financial research firm DALBAR, the average investor realised an average annual return of only 3.7% a year over the past three decades, underperforming the wider market by around 5.3% annually.
This underperformance can be traced back to several key mistakes that all investors make. To help you realise and understand the most common mis-steps, the Motley Fool has put together this new free report entitled The Worst Mistakes Investors Make.
Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.