How to save your money

By the time you hit 30, there are a number of steps you should have or are planning to take to build on your financial knowledge to secure your future finances.

Life has a way of passing you buy, and before you know it you’ve lived out your 20s and suddenly you’re a fully fledged adult.

Welcome to the 30s club! Up to now, you have probably learned enough about yourself and your finances to know at least the basics for managing your money. Now it’s time to build up the foundations of this knowledge and experience to set yourself up for the future.

There are a number of steps that should be employed by anyone in their 30s towards a better financial future. 10 principles have been outlined below that can help you in reaching your retirement goals:

1. Your first objective should be to clear all non mortgage debt. In Your 20s you are likely to have far less financial responsibility, but 30s tend to bring new financial obligations such as a family to support and a mortgage to repay. One of the most effective ways of freeing up your cash is by paying off your debts. It is assumed that you will have paid off any credit card debts over the last decade, but if this is not the case then this should be your priority.

The most effective way to pay off credit card debt is through transferring the debt to a credit card that has a 0% balance transfer period. This will allow you to set up a payment schedule to clear the debt over the 0% period, without incurring any more interest. Most credit card providers will charge a transfer fee of around 3%, but this is likely to be significantly lower that the high rates you’re currently paying.

After these high interest debts have been cleared, focus on clearing any student loans and other forms of debt.

2. Lose the debt habit. It’s no good clearing all of your debts if you go out and acquire new ones.
One way of avoiding debt is by saving up for costly purchases such as new car or kitchen appliances. Now you’re debt has been cleared, you could deposit the money you would have otherwise been paying in interest and repayments into a high interest savings account. For example, you have just made your final monthly repayment of £250 on a loan, rather than simply giving yourself more disposable income, continue to make the payments but into a bank account. After a year you will have saved £3,000 without even noticing any difference in your outgoings.

3. Start taking a serious view to retirement. Most people don’t plan for their retirement in their 20s. This wasn’t the time to start investing and you may not have been paying into a pension fund. Now it’s time to start planning for your future and looking at all of the possibilities in terms of retirement and a pension fund.

This is everything, from what age you wish to retire; how you would like to live – how much money you will require, all based on a realistic goal that you can reach through what can seem like a lifetime of investing. Time is still on your side, so use it before it passes you by and makes things difficult. The earlier you start the better, and the more chance you will have of enjoying a comfortable retirement without having to give up too much until then.

Before you begin to think about saving for your children’s futures, e.g. education expenses, ensure you have sorted yourself out. You can easily take a loan out to pay for college, but not for retirement.

4. Don’t put all of your eggs in one basket. You should diversify your investments to ensure your cash isn’t tied up in one sector, as markets have been known to crash and this could leave you with nothing.

It is generally recommended that you should try to invest around half of your portfolio to large companies, split evenly across growth and value.

You may want to look into putting some of your savings into fixed rate bonds. These accounts allow you to fix the interest rate paid on your balance for a specified period of time, allowing you to predict how much the investment will earn. This is also good as the base rate is on a downward path, as a variable rate savings account would reflect these changes by reducing the rates. By fixing the rate you can protect yourself from these reductions. There is an element of risk involved in fixed rate bonds, as rates could also rise through the life of your account, which would leave your savings subject to a lower rate than that offered to new and variable rate customers.

5. Every day’s a school day. Continue to learn and never stop investing in yourself. You will begin to widen your investment knowledge, and it is this that will help your earning power through informed decisions.

6. Protect your assets. There is only so much planning you can do to prepare yourself for the future and even what appears to be a full-proof financial plan can be derailed as a result of unexpected cost. It can pay off to cover yourself from every angle, allowing you to survive every “what if” scenario. This can be as simple as taking out adequate insurances to cover your possessions and even your life.

It is also a good idea to save for an emergency fund, covering yourself in the event of a job loss, medical emergency or anything else that life may throw at you. This should be enough to cover all of your outgoings for up to six months. This may all be too much to take on, so you may wish to start saving a small amount towards this fund so you can build up a more substantial amount over a time.

7. The simple life. Saving your gratification for a distant future might not be fun, but adopting a simple lifestyle is an effective way to reach the goals of today, while still achieving your long-term goals. Take a close look at all of your regular outgoings and spending to identify areas that could be trimmed for the cause. Small sacrifices can lead to big rewards.

8. Write a Will. This may seem like a hasty step to take, but if  the unthinkable happen, you would have no choice in where your possessions go. A will can ensure that your wishes are met, allowing you to specify who would be entitled to your assets.

If you’re a parent to children under the age of 18, think about who could take care of them should something happen to yourself and the other parent. This can also be specified in a will.

9. A price on your life. If you have somebody who depends on you financially, it is important that you consider taking out a life insurance policy. If you died, you would want to be sure that they were financially secure. At 30, there are some great life insurance deals available to you. The premium can be reduced based on certain elements, such as not smoking.

10. Tax free savings. An effective way of saving towards a better future and taking advantage of your tax free savings allowance is through cash and investment ISAs. Each year, all individuals are entitled to an ISA saving limit of £7,200, in which they can invest cash and investments. There is a £3,600 limit on cash ISAs within any one tax year, but you can invest the full £7,200 in a stocks and shares ISA, with a Capital Gains Tax (CGT) exemption of up to £9,600 per year.

Securing your money

Prime Minister Gordon Brown has said he will do “whatever it takes” to ensure that people’s savings are protected as the economy continues to battle through the financial crisis.

The possibility of savers losing money deposited into a bank never even crossed the minds of most people, and it was not until Northern Rock suffered financial problems and had to be nationalised that this possibility became more of a reality. The initial strategy started the Financial Services Compensation Scheme (FSCS) raising the level of potential compensation on savers deposits from £35,000 to £50,000. This limit is currently under review for a further increase.

After the Icelandic bank Icesave collapsed, many panicked as conditions with the way that their compensation scheme was set up meant that UK savers would not be covered for the first £16,000 of deposits. The UK government reacted by assuring all UK Icesave customers that their money would be refunded in full, regardless of any limits set by the FSCS.

So what measures have been put into place to ensure the safety of savers if a UK regulated bank or building society were to face similar problems?

The Financial Services Compensation Scheme (FSCS) was re-enforced last October to ease the crisis, and there has been a lot of debate over how to improve the system.

How has the system improved?

Before Northern Rock fell into trouble, the first £2,000 of savers money was fully protected, then 90% of the following £33,000 was protected. This meant that a £35,000 investment was only covered up to £31,700.

In October 2007, the system was re-structured, protecting savers for 100% of the first £35,000 per institution per person. This meant that as long as your money was spread out between different institutions, you could effectively protect large sums of money, and joint accounts would be seen as two people, therefore covering £70,000.

In October 2008 that threshold was again raised, from £35,000 to £50,000 per savings account
per institution.
A fast track strategy has also been designed to provide those affected with access to some of their savings within 7 days of a bank closing.

It would currently take around a month before savers would be compensated if a large bank were to close.

How much of my savings are covered?

As it currently stands, any UK bank, building society or credit union will guarantee protection for deposits up to £50,000.

Banks from outside of Europe must set up a UK subsidiary in order to be allowed to operate in the UK and those subsidiaries must have a FSCS membership to provide protection on your savings.

Other systems are in place for banks based in the European Economic Area (EU members plus Iceland, Norway and Liechtenstein) that cover against their home scheme.

These schemes are set up to provide compensation for at least the first €20,000, although some offer substantially more than that which can amount to more than current UK protection limit.

Most of these schemes are also partly covered by the FSCS so any remaining money between the €20,000 (around £16,300) and up to £50,000 is also covered.

All individuals are currently covered up to £50,000, so joint accounts are seen as two seperate individuals, thus covering up to £100,000.

The protection limit only applies per institution, so if you have more than £50,000 savings it is recommended that you spread the money around to ensure you are fully covered.

For example, if you had £50,000 saved with Alliance & Leicester and an additional £50,000 with Abbey,  the full £100,000 would be protected. However, if you had accounts held with different brands that fall under the same institution such as Halifax and Bank of Scotland, you would only be covered up to £50,000 of your £100,000. Some institutions also allow multiple claims over their brands, so make sure you have done some research before deciding where to keep your money.

For an up-to-date list of which banks fall under the same institution and which are counted as independent with individual registrations to the Financial Services Authority (FSA) see which4u’s List of banks by institutions.

Something else to keep in mind is that if you have your money in high interest savings accounts, your £50,000 can quickly increase, taking it over the protection limit so your interest will not be covered. The best way to avoid any problems is to work out how much interest you expect to accumulate, and invest the limit minus the difference.

What protection is provided for small businesses?

The FSCS set up the deposit protection scheme for private individuals. However, small businesses can also benefit from similar protection to savers if the limited company meets at least two of the following three criteria:

• A turnover of no more than £6.5 million

• A balance sheet total of no more than £3.26 million

• No more than 50 employees

Partnerships can only claim up to £50,000, rather than £50,000 per partner.

Sole traders can only claim up to £50,000 in total, with both personal and business accounts included. This means that personal and business accounts must be spread over different institutions.

What about Irish banks?

The Irish government recently decided to offer full protection on all deposits, bonds and debts. This gives investers the freedom to keep all of their money in one place without having to worry about the possibility of losing any of it.

The banks currently offering this unlimited protection are Allied Irish, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.

Gordon Brown has not followed Ireland’s move to offer an unlimited protection, but has stated that the government won’t let any UK depositors lose any money.