When you should commit to a regular savings plan - UAM

11th Jun 2021

When you should commit to a regular savings plan

Saving regularly can be a difficult habit to establish but once you make the commitment you will quickly see how it can help you to achieve your financial goals.

A regular savings plan will keep you focused on your goals and allow you to choose how you invest your money depending on your attitude to risk. You can also choose the appropriate term (short-term or long-term) and contributions based on your circumstances.

But before diving into the pros and cons of committing to a regular savings plan, let’s look at how a typical savings plan actually works.

How does a savings plan work?

Given the cost of living generally increases annually, inflation is a crucial factor to take into account when considering a savings plan. Therefore, when you invest, your minimum target should be to beat inflation every year.

To beat inflation, you and/or your financial adviser should choose a range of funds in which to invest that have historically performed above the rate of inflation.

A fund simply holds a collection of different equities that you own part of because you buy into the fund. A fund can offer the diversity you need to ensure your ‘eggs are not all in the same basket’. This approach is preferable to keeping money in a bank where you can lose money every year because of inflation.

Historically, over the long term, funds outperform all other asset classes including cash, bonds, property and commodities. However, it’s wise to bear in mind that past performance of individual funds is not a guarantee of future performance.

That’s because it is impossible for anyone to predict which investments will deliver the best returns every year into the future, especially when the stock market is susceptible to short-term volatility and major shocks such as global pandemics.

A financial adviser should always work with you to understand what level of risk you’re comfortable with before making any investment decisions.

The power of saving regularly

Investing lump sums or picking stocks carries risk, so by investing regularly over the long-term you can smooth out some of the peaks and troughs by what’s called cost averaging.

Cost averaging is a method that uses regular savings contributions to help smooth out investment volatility. The critical point about cost averaging is to invest an amount on a regular basis.

This is how it works: when prices are high, your regular contributions buy fewer units of the funds, but when prices are low your contributions buy more.

Over the long term, as the fund moves in an upward direction, this strategy increases the average value of each unit purchased. As a result, your overall returns improve. Saving regularly, and cost averaging, takes away any worry associated with trying to ‘time the market’ (working out the best time to invest).

It’s difficult to predict financial market movements and to get the exact timing of when to invest or disinvest just right, so saving steadily and regularly over time is key to ensuring success.

Start saving now

By starting to save now, you can make your money work harder for you over the long-term.

As your money grows, and that growth is reinvested, you will move a lot quicker towards achieving your financial goals. This is the financial force of compound interest.

yacht crew guide to savings

When you should commit to a regular savings plan

Committing to a regular savings plan essentially means agreeing to tying up your money for an agreed period of anywhere from 5 to 20 years. During that time, you make regular contributions that you agree at the outset of the plan.

Before deciding where and how to save, it’s important to think about what matters to you and to be clear about your financial goals. Also, take into account just how stable (or not) your current situation really is.

Be honest with yourself: what amount can you realistically commit to every month? Do you have enough in your emergency fund to keep making regular contributions to a savings plan if you’re not working for a period of time? Think carefully about the investment type and the duration you can commit to when considering a regular savings plan.

Before investing in any long-term or regular savings plan, talk to a financial adviser who can look at your circumstances and advise accordingly. They can help ensure that your savings and investment strategy fits with your financial goals and is suited to your tolerance for risk.

How much you should commit to saving regularly

The amount you can realistically save every month should always be based on your income and your expenditure. That’s why there is no hard and fast rule when it comes to a minimum amount you ‘must’ save. It’s entirely dependent on your situation and the type of savings plan you commit to. This is yet another reason why it’s always best to speak with a financial adviser.

A good financial adviser will carry out a detailed analysis of your situation before making any recommendations on how much is advisable to commit to a regular savings plan. Most importantly, it needs to be affordable for you.

The pros and cons of a committing to a regular savings plan

The advantages of committing to a regular savings plan include:

  • keeping you focused on your short and long-term savings goals
  • removing the temptation to spend by setting up an automatic direct debit
  • providing you with access to bonus rates to further boost your savings
  • the ability to select investment types based on your attitude to risk
  • access to financial review and support from a financial adviser.

As with any decision, there are some downsides you need to consider, such as:

  • locking into any plan commits you to saving regularly, which means you lose some flexibility over your salary
  • if life changes and you stop saving you may lose money
  • the returns are market-dependent which, as we pointed out earlier, can be volatile.

Want to know more?

As experienced financial advisers, we have access to multiple fund platforms and savings vehicles but before recommending the most appropriate saving plans for you, we take into account your circumstances and your financial goals.

Depending on whether your savings plans are short term (0–5 years) or long term (5–10+ years), we will recommend a mix of investment platforms and savings vehicles.

If you would like to know more about savings plans, get in touch with one of our financial advisers.