How to maximise savings?

Question

I am in my late 20s, living in the UK, and in my third year of professional work (one year industrial placement, two years since graduating from University). I have very little in the way of monthly expenditure at the moment- living in a house share (with very cheap rent), most bills included in rent, and have pretty much reached the limits on which the various bank accounts I have open will pay interest.

Since graduating, I have been saving using a few different current accounts which pay interest on balances up to a certain limit (a few of which have conditions that you have a number of Direct Debits going out from those accounts in order to receive interest on the balance of the account).

But since I am now at the point where I am earning interest on the maximum balance for most of these accounts, I am starting to look at other ways to save/ invest, but I'm just not really sure what to look into/ what the best options to explore are.

I have already opened: Santander 123 account, Bank of Scotland Classic Account with Vantage, TSB Classic Plus account and a Club Lloyds account, as well as having an ISA and one or two Regular Savers on-going. I am maintaining the maximum balance that you can receive interest on in each of these current accounts. My ISA matured recently (3 years paying 3.75%), and that balance is now sat in a Flexible ISA (earning 0.8%) while I explore what's best to do with it.

I take home roughly 1k per month after tax, rent and other regular outgoings such as food, travel, leisure, student loan repayments, phone/ broadband, etc.

I am at the point financially where I have saved enough to have a reasonable deposit on a house, but am not at the point in life where I want to commit to being a home-owner for a couple of reasons:

1. My work is contract based, so there's no guarantee that I will be working in the same location as I am at the moment, this time next year (in fact that's looking less and less likely, as the current contract is coming to an end, and there's some uncertainty as to when the client will begin the next contract- government projects). It would not be unrealistic to think that I may be in the situation where I don't have any work at all in a few months time, and so I am currently applying for other jobs.
2. Having gone through the usual cycle of school- university- job, etc... I am thinking that now would potentially be a good time to look into doing some travelling, so I would rather not pursue buying a house for the moment, in case I do decide to do some travelling for a year or so.

I have recently started watching the stock prices of a few companies to get an idea of investing in the stock market, but feel like I need to research this & watch the values for a while before I go ahead and invest in any shares.

I have a credit card, which I pay off monthly, but other than that, the only debt I have is my student loan (approximately £25,000).

So, given my situation, are there any other ways that I can save/ invest that I am not currently doing? Or would it be best to start using any excess funds, that I won't earn any interest on, to pay off my student loan quicker? The interest that my student loan is incurring is currently 0.9%.

Answer 1

First: it sounds like you are already making wise choices with your cash surplus. You've looked for ways to keep that growing ahead of inflation and you have made use of tax shelters. So for the rest of this answer I am going to assume you have between 3-6 months expenses already saved up as a “rainy day fund” and you're ready for more sophisticated approaches to growing your funds.

To answer this part:

Are there any other ways that I can save/ invest that I am not currently doing?

Yes, you could look at, for example:

1. peer-to-peer
2. structured deposits
3. index funds (passive investment strategy)

1. Peer to peer

These services let you lend to a 'basket' of borrowers and receive a return on your money that is typically higher than what's offered in cash savings accounts. Examples of peer to peer networks are Zopa, Ratesetter and FundingCircle. This involves taking some risks with your money – Zopa's lending section explains the risks.

2. Structured deposits

These are a type of cash deposit product where, in return for locking your money away for a time (typically 5 years), you get the opportunity for higher returns e.g. 5% + / year. Your deposit is usually guaranteed under the FSCS (Financial services compensation scheme), however, the returns are dependent on the performance of a stock market index such as the FTSE 100 being higher in x years from now. Also, structured deposits usually require a minimum £3,000 investment.

3. Index funds

You mention watching the stock prices of a few companies. I agree with your conclusion – I wouldn't suggest trying to choose individual stocks at this stage. Price history is a poor predictor of future performance, and markets can be volatile. To decide if a stock is worth buying you need to understand the fundamentals, be able to assess the current stock price and future outlook, and be comfortable accepting a range of different risks (including currency and geographic risk). If you buy shares in a small number of companies, you are concentrating your risk (especially if they have things in common with each other).

Index funds, while they do carry risks, let you pool your money with other investors to buy shares in a 'basket' of stocks to replicate the movement of an index such as the FTSE All Share. The basket-of-stocks approach at least gives you some built-in diversification against the risks of individual stocks. I suggest index funds (as opposed to actively managed funds, where you pay a management fee to have your investments chosen by a professional who tries to beat the market) because they are low cost and easier to understand. An example of a very low cost index fund is this FTSE All Share tracker from Aberdeen, on the Hargreaves Lansdown platform:

http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/a/aberdeen-foundation-growth-accumulation

General principle on investing in stock market based index funds: You should always invest with a 5+ year time horizon. This is because prices can move up and down for reasons beyond your anticipation or control (volatility). Time can smooth out volatility; generally, the longer the time period, the greater your likelihood of achieving a positive return.

I hope this answer so far helps takes into account the excess funds. So… to answer the second part of your question:

Or would it be best to start using any excess funds […] to pay off my student loan quicker?

Your student loan is currently costing you 0.9% interest per annum. At this rate it's lower than the last 10 years average inflation.

One argument: if you repay your student loan this is effectively a 0.9% guaranteed return on every pound repaid – This is the equivalent of 1.125% on a cash savings account if you're paying basic rate tax on the interest.

An opposing argument: 0.9% is lower than the last 10 years' average inflation in the UK. There are so many advantages to making a start with growing your money for the long term, due to the effects of compound returns, that you might choose to defer your loan repayments for a while and focus on building up some investments that stand a chance to beat inflation in the long term.