What could you do with your coronasavings?

The amount of people saving in the UK has spiked during Covid-19, with more people than ever tucking money away. But is this a good way to save or is there something else you could be doing with your coronasavings?
A number of coins | Wealthify
Reading time: 5 mins

The impact of coronavirus has completely changed how the UK as a nation deals with their savings. More than a third of Brits have eaten into their savings, with an average of £1,420 being withdrawn.[1] But this hasn’t been the case for everyone, as there’s been more than £175 billion saved into UK banks between March and June.[2]

If you’ve been negatively impacted by Covid it’s important to look after your financial health. This can be a hard time, and if you have emergency savings, then you probably understand the importance of having them.

If you have been able to tuck more money away due to working from home, it could be a good idea to start building your emergency fund.

 

Consider creating a robust emergency savings fund
This pandemic has highlighted the need for an emergency fund for thousands, if not millions, of people across the world. Having a little bit of money tucked away for a rainy day can not only help to relieve some pressure, but it could help to keep you going if times are tough.

If you’ve been able to save some money over the last few months, then a good place to start could be building up an emergency savings fund. Make hay while the sun shines, so they say. This needs to be money that’s quickly accessible in an emergency, so you probably don’t want it locked away or invested, as it’s good to know it’s there exactly when you need it most.

Quick access doesn’t necessarily mean in a piggy bank or tucked under your mattress though. Think of easy-access savings accounts, or even putting it aside within your current account if your bank has that option?

 

Looking for additional growth
After you’ve built up a solid emergency savings fund, normally around three months’ expenses, then you may want to think about what you can do to protect your money for the future. While instant access accounts are great, they’re not designed to be a long-term solution.

You see, as time goes on, things gradually become more expensive due to inflation. This means that something that would have cost you £100 in 2015 would cost you £111.70 in 2019 as inflation averaged 2.8% during this period.[3] So, if your money isn’t earning interest at the same rate as inflation, you won’t be able to buy as much with your money as you once could.

One way to beat this is to find an account that offers inflation-beating returns. But to achieve this, it may mean that you’d need to lock your money away for a few years, so make sure that you’re happy doing this. It’s also worth noting that you’ll need to check that your provider doesn’t lower their interest while you’re locked in, as this could deliver the same impact as a low-interest instant access account.

 

Consider investing
Investing doesn’t guarantee returns and there’s a risk you could end up with less than you initially put in but the aim is to deliver results that beat inflation. Because you’re not tied to any fixed interest rates, there is much greater potential for your money to grow and outpace inflation.

The thing with investing is that you do need to take some risk, but there are things you can do to lower the chances of you losing all your money. For example, you can hold a wide range of investments from all across the world – this is actually a technique called diversification – which could help to steady your investment plan as if one investment drops another could rise.

If you were already considering locking your money away to get better interest rates, then you may like to know that investing for the long term holds a lot of perks. For a start, you could benefit from the power of compounding – which is where profits from your investments are reinvested and can generate profits of their own. Over time this can snowball, and your savings have the potential to grow much faster.

Let’s show you just how that works. Say you invest £100 a month for ten years. The £12,000 you’ve invested could now be worth around £14,104.[4] Now, say you kept doing this for 20 years, you’d have invested £24,000, but your pot could be worth £34,546![5] And what if you kept this up for another ten years? Well, the £36,000 you’d have invested over this time could be worth £65,347![6] This is the power of compounding.

But that aside, data shows that long term investing tends to work out for the better – but keep in mind that although very insightful, past performance is not a reliable indicator of future results. For example, if you’d have invested in the FTSE 100 for any 10-year period between 1986 and 2019, there was an 89% chance that you would have made a gain.[7]

 

Think about the future
As we’re already talking about the long term, it may be worth thinking about saving for retirement – after all, it’s never too early to start! Plus, with a personal pension, you can get tax relief on your contributions, giving you more for your money – it’s worth noting that tax treatment depends on your personal circumstances and may change in the future. Say, for example, you put £80 into your pension, thanks to HMRC that would become £100 in your pension.

As you’d need to wait until you’re at least 55 to access the money in your pension, you’ll typically have a longer timeframe for your investments to reach their potential. This means that the earlier you start investing, the more you’ll be able to take advantage of compounding, which can really work to bulk out your retirement savings.

What’s more, with a personal pension, you have control over how much you contribute each month. So, if things change and you can’t put as much away, you can reduce, or even stop, your monthly payments. Alternatively, you may find that you’re able to continue saving and want to put away even more. How you choose to pay into your pension is completely up to you.

Getting started is easy too. Thanks to robo-investors, like Wealthify, you can open up an investment account or personal pension in minutes and start planning your future finances. All you need to do is figure out how much you want to invest each month and pick an investment style that matches your needs. That’s it. Our team of experts will do the rest, looking after your investments and monitoring everything to keep your plan on track.

 

References:

1: https://www.finder.com/uk/press-release-over-a-third-of-brits-have-needed-to-use-their-savings-during-the-lockdown

2: https://www.bankofengland.co.uk/statistics/money-and-credit/2020/june-2020

3: https://www.bankofengland.co.uk/monetary-policy/inflation/inflation-calculator

4: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £11,736. If markets perform better, your return could be £16,844. Values correct as of 21/08/2020

5: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £26,385. If markets perform better, your return could be £45,375. Values correct as of 21/08/2020

6: This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £45,621. If markets perform better, your return could be £99,324. Values correct as of 21/08/2020

7: Data from Bloomberg

 

Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.

 

Please remember that past performance is not a reliable indicator of your future results.

 

With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.

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