9 min read

How to save for your long-term goals

Hannah Salih
7 September 2017

Welcome to the Savings series (Article 1 of 3)
Finding savings a struggle? Find out how to save for your financial goals , no matter what they are, with the first in a three part series of articles showing you the best saving hacks.

Whether you’re saving for something 6, 10 or even 30 years in the future, we’ll help you understand your options so that you can make the most of your money.

Typically, any financial goal you want to reach in over five years’ time is considered a long-term savings goal. The most common goal is saving for retirement, but there's lots of others such as saving for your child's education or their first home.

With long-term savings goals, you won't have an immediate need for the money. This means you can lock your savings away for longer. And if you want to invest (for example, in stocks and shares), you might be able to take a little more risk. This is because, even if your investments take a downturn, your savings have more time to recover.

Why is saving for the long-term different?

Saving for a goal in the distant future presents one big hurdle that’s less of an issue in the short-term: inflation.

Inflation is an overall increase in the cost of living, caused by increasing prices. Because goods and services become more expensive to buy, it causes the real value of money to fall. As a result, your money may buy you much less 10 years down the line than it would when you first started saving.

If you’re saving for something over 5 years in the future, you’ll probably want to put your money into a product that will help your money grow enough to counter the effects of inflation.

Bank accounts and other types of savings methods that hold your money in cash probably aren’t the best way to save for your long-term goals. They tend to be the safest places to hold your money but don’t tend to offer high enough interest rates to grow your money. Investing is usually the better option, but every investment has risk attached. Investing can also seem like an intimidating process. But luckily there are many investment products designed to help you achieve specific long-term savings goals.

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Saving for retirement

The best way to save for retirement is usually to put away a sum of money into a pension fund every month.

There are two main types of pension plans that help you to create a fund big enough to live off when you retire: workplace pensions and personal pensions.

A workplace pension is a scheme set up by your employer. Typically, these let you save through a combination of your own contributions and contributions from your employer.

A personal pension scheme is a retirement savings plan that you arrange yourself. They’re an especially good idea if you are self-employed or ineligible for a workplace pension, although anyone can set one up. So, if you wanted, you could use a personal pension to supplement your workplace pension.

Most types of retirement plans work by investing your monthly contributions. The aim is to grow the overall sum enough to provide you with a regular income when you retire.

Any interest you earn on your pension is tax free. You’ll also get tax back on your contributions, up to certain limits, which then gets added to your pension pot.

Pension plans and risk
As with other types of investment, personal pension plans usually offer three levels of risk: cautious, balanced or adventurous. However, your money is always at some risk, even with a cautious risk profile. Most pension plans tend to invest your fund in somewhat riskier investments during the first few years. This is done to grow your pension pot more quickly. As you start approaching retirement, your money is gradually switched to more conservative investments.

Specialised ISAs

If you have a specific savings goal in mind, certain types of ISAs may offer additional benefits.

Lifetime ISAs

Launched in April 2017, you can open a lifetime ISA if you’re under 40 and:

  • you’ve never owned a home
  • you want to save for retirement

You can save up to £4,000 a year tax free, until you’re 50. The government will also throw in a 25% bonus to your savings. This is up to £1,000 per year. Lifetime ISAs can be either cash ISAs or stocks and shares ISAs.

You can use the money to buy your first home after only 12 months. But, you have to wait until you’re 60 to withdraw your savings for anything else. If you withdraw the money before then, you’ll be charged a penalty. This will 25% of everything you’ve saved up to that point.

Junior ISAs

This type of ISA allows you to save money, tax free, on behalf of your child. Again, you can save either in cash or in stocks and shares. Your child can take over the account on their 16th birthday, but they won’t be able to access the money until they’re 18.

Investment funds

Of course, pension schemes and ISAs aren’t the only two ways you can invest your money. You could put your money in an investment fund. Or, alternatively, you can pick and choose your investments individually.

There are four main types of investments you could make: shares, property, bonds and cash. You could also invest in things like foreign currency, collectibles and even commodities such as gold or oil.

Jargon buster:
Different types of investments are known as ‘asset classes’.

When you make more than one investment, the various assets you own are known as your ‘investment portfolio’

From any investment the hope is that you’ll eventually make a profit. This is known as the ‘return’.

‘Risk’ is the chance that an investment you make won’t offer the returns you expected.

The sky's the limit when it comes to investing. And some kinds of investments can offer the opportunity of huge returns. But there’s no such thing as a ‘guaranteed’ investment. There’s always some level of risk involved.

The higher the potential returns on an investment, the riskier it is likely to be. Never rush into an investment, take the time to weigh up the best option for you. It’s also a good idea to consider the worst case scenario – what would you do if you lost all the money you invested?

If you need help you can go to a financial advisor. A regulated financial advisor will ask about your circumstances, goals and attitudes to risk. Then they can recommend suitable (and affordable) possible investments.

Want to find out more about the investing basics? We’ve got an article on how to start investing that explains it all.

Now you know all your options you can start saving now to help you get the future you want.

Don't stop here - keep going
Now you've read the first article, take a look at the next article, on how to start a personal pension

In a nutshell:
  • A long-term savings goal is a financial goal you want to achieve in more than five years’ time.

  • Since you don’t need your money immediately, you have more flexibility when it comes to your savings options.

  • Long-term savings can be subject to inflation. For this reason, investing may be better than holding your money in cash.

  • Depending on your goals, you can find specialised types of long-term savings accounts. Personal pension plans, for example, are specifically designed to help you save for your retirement.

  • All investments carry risk, so it’s a good idea to diversify. A financial adviser can help you decide on the best investment strategy for reaching your objectives.

by Hannah Salih

Hannah reads all the finance info on the web so you don't have to. She knows all there is to know about your finances but still spends all her money on brunch. 

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