If you are yet to turn 40 you have the golden opportunity of free cash for decades — but only if you can rise to the savings challenge.
The Lifetime Isa (Lisa), announced in George Osborne’s budget, will give you a 25 per cent bonus when you save towards your first home or retirement, and all interest is tax free.
Those who can put in the maximum allowed each year — Pounds 4,000 — will receive a Pounds 1,000 annual boost. If you save the full amount from age 18 to 50, you will get Pounds 32,000 in free money.
You have to wait until you are 60 to access the cash without incurring a penalty, unless you use it to buy your first home, but Calum Bennie, a savings expert at Scottish Friendly, the Isa provider, says: “The attraction of a top-up from the government is too good to miss for younger basic-rate taxpayers.
“There is no doubt that it’s hard to save in the early stages of working life but, provided you stick to the rules of this Isa, you will be glad you invested.”
The Lisa won’t start until April 2017 so you have a year to get your finances in shape. Here’s what you should do
1. Set a budget and stick to it
“The most important thing is to be brutally honest,” says Joel Marks, the cofounder of Opencast Financial, a company specialising in mortgage advice. “There is no point in looking at your spending through rose-tinted glasses.”
He recommends highlighting your base salary and comparing it with your outgoings for one month.
“Rank your spending — your mortgage would come first, followed by utilities and council tax.” Bottom of the pile is your discretionary spending; nights out and clothes are splurges that you can trim.
Drocelle Benezet, the director of Budget Mastermind, says: “Start with Where to get help Moneydashboard.com — links to your bank account and has colourful spending and saving graphs to help you to change your behaviour. Ontrees.com — puts spending in different categories so you know exactly where the money is going. Toshl — a spending diary app that reminds you to keep it up to date Topcashback — shows if you can earn money on the things you buy the basics: how much do you spend on bills? How much would you like to invest? How much would you like to save and spend? Once you’ve divided your money into those basic categories, you have a pretty good foundation for building a more specific budget.”
2. Go for the easy kills
Don’t attempt to make ambitious cutbacks all at once. Start with little luxuries, such as that regular cup of coffee. Fidelity Investments suggests that reluctant savers try an Isa Cappuccino Plan. It reckons that Pounds 2.50 spent on a daily caffeine fix could be diverted into a stocks and shares Isa, giving you Pounds 50 a month (Pounds 600 a year) to play with. Not only would that attract a Pounds 150 bonus in the Lisa, your total returns after ten years could exceed Pounds 7,000 if your investments grew at 5 per cent a year. Rachel Springall, at Moneyfacts.co.uk, says: “Making lunches each day and taking advantage of coupons will also help save on food expenses.”
3. Do a proper audit on your bills
Jody Baker, the head of money at comparethemarket.com, says: “Regularly shopping around and switching Student savvy Amy Wotton, a 22-year-old architecture student at the University of Edinburgh, budgets carefully and has been able to live on her student loan and grants without asking her parents for help.
She says: “As funds are limited, I do find it useful to use budgeting apps to keep a track of how much I am spending on a weekly basis. For example, I would set aside a figure of Pounds 50, and if I spend less, the remainder would carry over to the next week, and if I spent more the deficit would carry on to the next week. I also use sites such as TopCashback, Maximiles and Nectar Canvass to earn extra money. Since I have been at university this has provided me with several hundred pounds extra to spend, which can’t be bad for very minimal effort.”
Ms Wotton has already set up a Help to Buy Isa to put towards a deposit. She says: “It seemed like a no-brainer because the government will top up the final value with an additional 25 per cent.”
supplier is the most effective way to ensure that you get the best prices. Some insurers discount the first year’s cover, so when it comes to renewal, the next year’s cost can be higher, making switching essential.” Ms Baker reckons that millennials who switched energy, home and car insurance every year would stand to gain more than Pounds 500, giving them Pounds 5,082.40 to put into a Lisa over ten years.
4. Get your debts under control
Mr Marks says: “Anyone who has an expensive unsecured loan or creditcard debt should look to pay that off before they start to save.” Ms Springall, meanwhile, advises switching to a better deal. “We are in a market where balance-transfer credit cards are rife and there are cards with interest-free deals and no upfront fees.”
5. Use your current account wisely
You shouldn’t be paying a fee for your current account, nor is it wise to rack up charges every time you use your overdraft. Ms Springall says: “With the seven-day switching service it’s faster and easier than ever to move your current account.”
Those who don’t want to switch but are in the red may want to consider a money-transfer credit card. It works like a balance-transfer credit card but credits your current account instead of clearing a card debt. Virgin Money offers this service interest-free for 40 months with a 4 per cent fee.
Paul Ward, of Professions Practice Finance, which offers business loans to professionals, recommends opening two accounts. “One should have enough money to pay your monthly bills plus a float of Pounds 50. Use the other as your daily spending account. If you find that you are still going overdrawn, try taking cash out at the start of the week and don’t carry your debit card.”
6. Catch the savings habit
A savings habit fostered over a few months will soon become effortless. “Just do it,” says Frank Mukahanana, the chief executive of Quidcycle, a peer-to-peer lending platform. “Set up a standing order and forget about it. You can also create accountability by telling a close friend and creating peer pressure to help you stay on course.”
Mr Ward recommends setting up a regular payment into your Lisa the day after you get paid and keeping a separate savings account containing about three months’ salary for emergencies and other goals, such as holidays.
7. Venture out of your comfort zone
The Lifetime Isa will be a vehicle for cash deposits and stocks and shares investments. Go with the latter to turbo-charge your returns. Michelle McGrade, the chief investment officer at TD Direct Investing, says: “Diversification is important; I would buy funds rather than individual stocks. Pick an area of finance that you are interested in, whether that’s China growth, UK fashion brands or the environment. Read about them so you understand the sectors, and then you can apply that knowledge to your investing.”
Mr Bennie says there is no guarantee you will get back what you put in. “But as a young person, you are investing for the long term and you’ll be able to ride out the ups and downs of the market.”
supplier is the most effective way to ensure that you get the best prices. Some insurers discount the first year’s cover, so when it comes to renewal, the next year’s cost can be higher, making switching essential.” Ms Baker reckons that millennials who switched energy,