Pension contributions to compound interest – the topic of money is vast
Back in September 2014, financial education became a compulsory part of the national curriculum in England. However, for many, there’s still plenty to learn when it comes to the topic of one’s finances. Jamie Jenkins, head of global savings policy at Standard Life, has spoken to Express.co.uk about what he believes are the seven most important lessons about money. So, from saving money on everyday spending to maximising savings, what does he think the population should be aware of?
1. Budgeting 101
According to Mr Jenkins, keeping track of outgoings could be very important.
“Putting money away for the future as early as you possibly can means being savvy with your current spending and learning how to budget as effectively as possible,” he said.
“When it comes to budgeting, there are two main considerations. Firstly, how much money do you need to cover your regular outgoings?
“There is no clear-cut answer to this because it differs for everyone. Calculating a budget for your main spending habits (including everything from mortgage or rent payments and bills, to food shops, travel and socialising) will help you understand how much you need to live on.
“See how much money you have left at the end of each month and consider setting up a standing order to squirrel this away into a savings account.
“You then need to consider whether it’s possible to reduce your main spending habits. It might be easier said than done but there are lots of ways to do this.
“Shop around to get the best deals on bills and make use of money saving apps to track your spending.”
2. The low-down on bank rates and inflation
From borrowing loans to earning interest via savings accounts, interest rates can have an impact on a person’s finances.
But just how do they change, and what does it mean in terms of personal finance?
Mr Jenkins explained: “The Bank of England (BoE) is the UK’s central bank. It makes decisions on the UK Bank Rate, more commonly known as the ‘base rate’. But what does that mean for you?
“The base rate impacts the rates banks charge us to borrow money or that they pay into our savings. It currently stands at 0.75 per cent, which is low by historical standards. This means it is generally easier to borrow money but the interest you get on your savings is also low.
“If interest rates were to rise, it would be more expensive for households and businesses to borrow but it can become more rewarding to save.
“Something else you will hear a lot about in the news is ‘inflation’. In short, this refers to the rise in the cost of everyday goods and services we buy.
“If your savings receive a lower amount of interest than the rate of inflation, then the real value of your money is reducing.
“For example, if you had £100 in a bank for a year with a one per cent interest rate, you’d have £101. However, if inflation was two per cent then the cost of £100 worth of everyday goods would have risen to £102.”
3. The tax rules that apply to savings
When it comes to saving money, the Personal Savings Allowance (PSA) – introduced on April 6, 2016, means that the majority of savers in the UK don’t have to pay tax on their savings income.
Nevertheless, some people will still opt for the tax-free option of an ISA.
Pension contributions to interest: It could be good to be in the know about tax rules on savings
“Individual Savings Accounts, or ‘ISAs’, are very popular as they enable you to save your money tax-free and usually still allow access to it when you need it,” Mr Jenkins said.
“You can save into a Cash ISA and earn interest, or invest into a Stocks and Shares ISA – both allow you to contribute up to £20,000 tax efficiently each tax year. But remember with a Stocks & Shares ISA, your money is invested so its value can go down as well as up.
“There are different types to suit different needs, whether it be a Help to Buy ISA or a Lifetime ISA, so it’s important to use one that suits your needs.”
Some people may wonder whether they’re better off getting a cash ISA, as opposed to saving money in a regular savings account.
Mr Jenkins said: “Cash ISAs can provide higher interest rates than ordinary bank accounts and are not subject to the ups and downs of investing, but they may still fall short of beating inflation, or they may require you to tie up your money for a year or more to benefit from the higher interest rate.”
4. How to make your money work harder
While investing may not be for everyone, it could be something some choose to look into.
Mr Jenkins said: “When you invest your money, you’re giving it a chance to grow in value. There is no guidebook to tell us how much and when to invest our money. If you choose to invest, generally the sooner you start, the longer the opportunity your money has to grow.
“The final value of your investments will depend on three main factors – how much you pay in, how your investments perform and how long you’re invested for.
“Generally speaking, the more you pay in, the longer you can keep your money invested, the more you’re likely to get back at the end.
“Your investments can go down as well as up in value, especially in the short term, and they could be worth less than originally invested. That’s why the longer you leave your money invested, the more opportunity you have to see it to grow in value.”
5. The wonder of compound interest
“It might sound dull but the effect of compound interest on your money is very powerful,” Mr Jenkins said.
“Let’s say you save £100. The interest you get will be added to that £100. And the next year, the interest you get is added to your original £100, plus all the previous growth.
“If you leave your savings to grow, this happens year on year – it’s the ‘snowball’ effect. The growth may be small over one year, but over time compounding can potentially build up the value of your savings significantly.
“So if your goal is to save to achieve a large final amount, compound interest will help you over time. In the case of a savings account, the interest is compounded either daily, monthly or quarterly, and you will earn interest on the interest.
“In a deposit interest account cash is generally secure. The impact of compounding can also apply to investments, however investments are not secure. Their value can go down as well as up, and could be worth less than originally invested.
Pension contributions to compound interest: Being clued-up about money is important to many people
In simple terms, a modern, flexible pension is a long-term savings plan and a tax-efficient way to save money during your working life
6. Retirement plans
Retirement may seem like a long way off for some people, but planning for one’s later years isn’t something to forget about, Mr Jenkins warned.
He said: “As soon as you enter the world of work you’ll likely be paying into a pension so it is important to know what it is and why you should take it seriously.
“In simple terms, a modern, flexible pension is a long-term savings plan and a tax-efficient way to save money during your working life.
“You pay in, and if you have a workplace pension, your employer contributes too. That money is then invested, and has the chance to grow over time.
“How much you get when you’re ready to take your pension – currently you are allowed to from age 55 – will depend on how much you invest, how your pension investments perform and how long you’re invested for.”
7. Knowing your history
A credit score is something which most adults will have, and it can have an impact on the rates a borrower is offered.
“As well as thinking about saving, it’s important to understand how financial providers see you,” Mr Jenkins said.
“When you apply for most financial products, such as mortgages, credit cards and overdrafts, lenders will normally run a credit check on you to calculate the risk of lending you money.
“If your request is declined, this has a negative impact on your credit score, so it’s wise to make decisions carefully and not make lots of unnecessary applications.
“A good credit score is important. From helping you qualify for the best interest rates and terms for a mortgage to influencing your chances of a new phone contract, it will impact you in more ways than you’d ever imagine.”
So, how can one go about seeking a more healthy looking credit score?
“Some ways to improve your credit score include paying all your bills on time, paying off your debt and only applying for new credit accounts when needed,” Mr Jenkins suggested.
“Registering to vote also makes a big difference as electoral details are recorded and this data helps lenders confirm your name and address, so your score will increase as a result.”
The team at Standard Lift added that laws and tax rules can change, and the value of tax benefits will depend upon individual circumstances.
“The information here is based on our understanding in August 2019 and should not be taken as financial advice,” they added. “The value of investments can go down as well as up, and could be worth less than originally invested.”