Saving. Lessons why you should or should not.

[Itsallaguess]

What lessons can be made to help make the "better" decisions.

I think one of the best steps towards making 'better financial decisions' is to start with at least clearly recognising that often they are 'decisions', and not 'inevitabilities'...

'You can only spend a pound once' is a powerful message to help with that recognition in terms of personal-finance, and perhaps especially so for a younger audience who might not yet appreciate it...

Cheers,

Itsallaguess

[Alaric]

You need to consider the risk free rate of return (r) for that currency.

No you don't. Think of holding coins, bank notes or current bank account. Money rate of return is zero. Real rate of return is minus whatever the inflation rate is.

[dealtn]

You need to consider the risk free rate of return (r) for that currency.

No you don't. Think of holding coins, bank notes or current bank account. Money rate of return is zero. Real rate of return is minus whatever the inflation rate is.

If you choose to hold in notes and coins and not avail yourself of the risk free rate then that debasement is through your choice, not the governments or the mpc deciding on how to implement the policies in accordance with the remit.

[Alaric]

not the governments or the mpc deciding on how to implement the policies in accordance with the remit.

My point is that I don't agree with the remit of debasing the currency. What is so frightening about the costs of goods and services becoming slighlly cheaper every year?

[vand]

...By contrast, exhibit B is a household that is very frugal and manages to live on 30% of its income while saving and investing the other 70%. A 10% rise in the cost of living changes their spending/saving ratio from 30/70 to 33/67 - barely enough make any difference to their journey to becoming financially independent. Even a 20% real rise will only change it to 36/63. They can easily absorb changes in the cost of living that would cripple households who are unable to save heavily...

In the meanwhile the 10 or 20% rise will devalue the all the previous years of savings such that each new year loss outweighs the new years of savings such that their journey to financial independence is a masterclass in backwards marching
Do I get that right?

Everyone hopefully understands that there will be inevitable times when your investments go down in (real) value.

Inflation just sets a higher hurdle for any asset to clear before it can start to earn a real return - your previously accumulated investments might still do that. In any case, even if they don't, the setback is usually only temporary and in the meantime you are continuing to accumulate more at a cheaper real price.

That's the other thing about saving - the practice of saving gives you the wherewithall to be able to take advantage of the best opportunities when they happen to come along. If you have no margin of safety and no reserve built into your personal finances then you will rarely be in this position. You want to be the person positioned to buy during a firesale, not the one who is a forced seller.

[Gerry557]

I have been told that one family that was saving stopped as their benefit (not sure which one) reduced with the income that they got from their investments. I think they changed some to accumulation units from income units to avoid the reduction. I'm not up to speed on benefits, family credits thing maybe.

Saving income shouldn't matter is it is in an ISA or SIPP. I'm also no longer on point with tapered benefits, but when I was generally the ones who suffered were recent redundants who'd built a safety net

I've since found out that it was Child Tax Credits. I don't know how they work but apparently the extra income ment the credits were reduced. I'm not sure if there are a taper effect, I know some benefits have them. Ie earn £2 and the benefits reduce by £1. I also thought there was a limit, I think it used to be £15k, that if you had more prevented access to some benefits. I suppose you don't want millionaire ISA holders claiming dole.

[Gerry557]

Most people here are probably in the should save camp.

I'm trying to put together reasons why you should save and or arguments against the negative effects of saving. Something for older school kids or new younger workers.

I know my own reasons but just happy to hear maybe something different or left field that I might not have considered.

So why save?

Savings are useful for people who haven't built up a large redundancy entitlement and perhaps to budget for holidays and house repairs beyond that I recommend against it. I retired in my 40s thanks to doing a lot of investing and having no savings worth mentioning. So I say sure have a modest cash buffer but once you have that invest and never save. The long term real returns on cash are close to zero.

When I mentioned savings, it could be cash, shares, gold or forms of wealth to help you at a later date should you need it.

[DrFfybes]

I have been told that one family that was saving stopped as their benefit (not sure which one) reduced with the income that they got from their investments. I think they changed some to accumulation units from income units to avoid the reduction. I'm not up to speed on benefits, family credits thing maybe.

Saving income shouldn't matter is it is in an ISA or SIPP. I'm also no longer on point with tapered benefits, but when I was generally the ones who suffered were recent redundants who'd built a safety net

I've since found out that it was Child Tax Credits. I don't know how they work but apparently the extra income ment the credits were reduced. I'm not sure if there are a taper effect, I know some benefits have them. Ie earn £2 and the benefits reduce by £1. I also thought there was a limit, I think it used to be £15k, that if you had more prevented access to some benefits. I suppose you don't want millionaire ISA holders claiming dole.

Just in case you thought it couldn't get any more convoluted, I had a little look....

On https://www.gov.uk/guidance/tax-credits ... out-income it says...

"Income from dividends
Include any UK company dividends you’ve received. Also add in the tax credit — shown on the dividend voucher supplied by the company."

followed by..

"Saving and investment income
Include the amount before tax is taken off. Do not include interest from tax-exempt investments like Individual Savings Accounts."

However, the ISA exemption is NOT listed in the 'dividends' paragraph!

There is a general exemption of the first £300 of income from either source,

Savings accounts in the child name are exempt, savings in Trust for the child are not, hance a JISA is a better option that a Trust until they are 18.

See --- all very simple and clear

Paul

[pje16]

However, the ISA exemption is NOT listed in the 'dividends' paragraph!
Paul

I wouldn't expect it to be, as no tax is deducted from them (on UK holdings)
but it does mention,

“Saving and investment income
Include the amount before tax is taken off. Do not include interest from tax-exempt investments like Individual Savings Accounts”.

[Gerry557]

Having looked at the link, I agree it's not clear. Maybe you can earn dividends but below £300.

In an ISA do you get the vouchers.

Still its has had a negative effect on them wanting to save. They could be mistaken or the tax office gave them incorrect information based on the link that put them off when in fact they might have been able to continue to at least they were approaching the £300 income level.

[pje16]

In an ISA do you get the vouchers.

Vouchers for what?
Some online brokers will provide a PDF version of the payment amount

[Alaric]

Vouchers for what?

Most dividend and saving income is now paid gross, so adding back notional tax credits is obsolete. Property Income Distributions are an exception.

But it does leave an open question as to what extent, if at all, dividends and interest in an ISA are clawed back when the recipient is in receipt of benefits that are means tested in some manner.

[gnawsome]

[i]

In the meanwhile the 10 or 20% rise will devalue the all the previous years of savings such that each new year loss outweighs the new years of savings such that their journey to financial independence is a masterclass in backwards marching
Do I get that right?

Everyone hopefully understands that there will be inevitable times when your investments go down in (real) value.

Inflation just sets a higher hurdle for any asset to clear before it can start to earn a real return - your previously accumulated investments might still do that. In any case, even if they don't, the setback is usually only temporary and in the meantime you are continuing to accumulate more at a cheaper real price.

That's the other thing about saving - the practice of saving gives you the wherewithall to be able to take advantage of the best opportunities when they happen to come along. If you have no margin of safety and no reserve built into your personal finances then you will rarely be in this position. You want to be the person positioned to buy during a firesale, not the one who is a forced seller.

Hi Vand, thanks for that reply - it marries with my own intended practice, such that I have been buying mainly top-ups and offers thro' this year. All with the aspiration of improving my 'moat'.
My trouble is I can't offer evidence to later generations that what I am doing is the 'right thing' and it gets more difficult to do so as the cost of the care that may well be staring me down will by increasing in leaps and bounds.
I do have assetts and reserves and income from them that I had hoped would be sufficient to meet the costs of care...
I call to mind an old saying " The good times are coming -- hope we live long enough to see 'em"
I still have the image that the saver of £10k pa for 10yrs has a nominal £100k and this year his saving of £10k will barely pay for the inflation loss of the earlier years and it may well be worse in that most(?) of those years will have suffered from inflation.
I have no (acceptable) suggestion to make and am constantly embarassed that 60 years on from my first investment I still know so little

[DrFfybes]

However, the ISA exemption is NOT listed in the 'dividends' paragraph!
Paul

I wouldn't expect it to be, as no tax is deducted from them (on UK holdings)
but it does mention,

“Saving and investment income
Include the amount before tax is taken off. Do not include interest from tax-exempt investments like Individual Savings Accounts”.

Yes, but this is about amount of income, not whether it is/has bees taxed. Above a certain income level, the benefit is reduced. The question is what counts towards the threshold.

And as per you quote above (which is the same bit I quoted), the important bit is the bit I have emphasised, which suggests ONLY interest is discounted. Of course if you invest in a fund that pays "interest" as opposed to "dividends" then you could discount that if held in an ISA.

[AWOL]

Most people here are probably in the should save camp.

I'm trying to put together reasons why you should save and or arguments against the negative effects of saving. Something for older school kids or new younger workers.

I know my own reasons but just happy to hear maybe something different or left field that I might not have considered.

So why save?

Savings are useful for people who haven't built up a large redundancy entitlement and perhaps to budget for holidays and house repairs beyond that I recommend against it. I retired in my 40s thanks to doing a lot of investing and having no savings worth mentioning. So I say sure have a modest cash buffer but once you have that invest and never save. The long term real returns on cash are close to zero.

When I mentioned savings, it could be cash, shares, gold or forms of wealth to help you at a later date should you need it.

I think there remains value in the traditional differentiation of savings and investment as people often make mistakes by not considering the proper role for each or inappropriately allocation of capital between them. This can lead into useful questions such as what the properties of savings and investments are, what are the pros and cons of each, which is "safest" and against which risk is it safest and against which timescale (which leads to the effect of inflation). Traditionally many households save too much and invest too little due to ideas like "the stock market is just a casino".

The individuals circumstances and tolerance for risk play into this. From this topic there is a natural lead into pound cost averaging/ravaging, investing lump sums (aka "windfalls" such as an inheritance), etc.

If not interested in these conversations then the answer for "Should one save?" is "Do you wish to get wealthier?". If one does one should invest assuming one has enough savings/insurance/redundancy entitlement to cover unexpected events.

[vand]

Most people here are probably in the should save camp.

I'm trying to put together reasons why you should save and or arguments against the negative effects of saving. Something for older school kids or new younger workers.

I know my own reasons but just happy to hear maybe something different or left field that I might not have considered.

So why save?

Savings are useful for people who haven't built up a large redundancy entitlement and perhaps to budget for holidays and house repairs beyond that I recommend against it. I retired in my 40s thanks to doing a lot of investing and having no savings worth mentioning. So I say sure have a modest cash buffer but once you have that invest and never save. The long term real returns on cash are close to zero.

When I mentioned savings, it could be cash, shares, gold or forms of wealth to help you at a later date should you need it.

Yes.. I'm rather forgiving about the taxonomy here. savings in the context of this discussion should mean any earned income that is used to increase your net worth. Even paying down debt can technically be classed as savings in this regard.

[Urbandreamer]

I think there remains value in the traditional differentiation of savings and investment as people often make mistakes by not considering the proper role for each or inappropriately allocation of capital between them. This can lead into useful questions such as what the properties of savings and investments are, what are the pros and cons of each, which is "safest" and against which risk is it safest and against which timescale (which leads to the effect of inflation). Traditionally many households save too much and invest too little due to ideas like "the stock market is just a casino".

Indeed, so. You can see this in previous points about debasement and inflation.

I find it interesting that you mention the old view "the stock market is just a casino". It's no longer as popular today, the concept seems to have moved to cryptocurrency.

The subject of crypto is huge and a bit of a minefield. However, specifically bitcoin currently has a fixed supply cap. Hence, it can be argued that you can "save" in it. Though it is far from "risk-free", if its value is measured in fiat.

I believe that the OP is interested in reasons for and against putting something aside for the future (one usage of the term saving). How to manage that aspect of finance, be it cash savings in local currency, hard assets (a car or house), equities or savings in other currencies (US TIP's?) being a different question.

You are right that most households don't invest enough, though I'm less convinced that they save too much. Statistics would seem to indicate that they don't "save" enough either. In my opinion, it's a problem of ideology and philosophy, rather than financial education. You see, I don't think that there are any immutable answers to how to manage personal or household finances. I believe that the problem is that most people don't want to think or manage this aspect of their lives.

As times change, so we need to adapt to the times. There have been a number of posts relating to ISA's and taxation, which I feel should make the point. Taxation changes on a regular basis, hence we need to change our actions because of those changes. Taxation is just one example of how situations change, the current energy costs could be another. I.E. it may make good financial sense to buy an air fryer on the credit card, despite being able to continue to cook most things in the oven without buying one.

[Femi]

My 10 year old grand daughter recently started her own business making and selling jewelry and fashion accessories on facebook. In her first month she has made £800, I asked her what she is going to do with the money. She told me she has a plan ...

1. Replace and enhance her stock offer
2. Keep 50% of what is left to spend on things she wants
3. Save the rest, either in her cash ISA or giving it to me to add to her Stocks and Shares ISA.

Needless to say I was very proud of her, seems she has listened to me over the last few years

[XFool]

Vouchers for what?

Most dividend and saving income is now paid gross, so adding back notional tax credits is obsolete.

Normal ordinary share dividends have been "paid gross" now for over a quarter of a century!

[GoSeigen]

I have been told that one family that was saving stopped as their benefit (not sure which one) reduced with the income that they got from their investments. I think they changed some to accumulation units from income units to avoid the reduction. I'm not up to speed on benefits, family credits thing maybe.

Saving income shouldn't matter is it is in an ISA or SIPP. I'm also no longer on point with tapered benefits, but when I was generally the ones who suffered were recent redundants who'd built a safety net

I've since found out that it was Child Tax Credits. I don't know how they work but apparently the extra income ment the credits were reduced. I'm not sure if there are a taper effect, I know some benefits have them. Ie earn £2 and the benefits reduce by £1. I also thought there was a limit, I think it used to be £15k, that if you had more prevented access to some benefits. I suppose you don't want millionaire ISA holders claiming dole.

Just in case you thought it couldn't get any more convoluted, I had a little look....

On https://www.gov.uk/guidance/tax-credits ... out-income it says...

"Income from dividends
Include any UK company dividends you’ve received. Also add in the tax credit — shown on the dividend voucher supplied by the company."

followed by..

"Saving and investment income
Include the amount before tax is taken off. Do not include interest from tax-exempt investments like Individual Savings Accounts."

However, the ISA exemption is NOT listed in the 'dividends' paragraph!

There is a general exemption of the first £300 of income from either source,

Savings accounts in the child name are exempt, savings in Trust for the child are not, hance a JISA is a better option that a Trust until they are 18.

See --- all very simple and clear

Paul

It's not that convoluted. The application form notes make it clear:

"Income from savings and investments, including dividends.
Enter the gross amount, but do not include tax exempt savings like ISAs."


No ISA income of whatever source need be declared.

The web pages probably just contain various drafting errors. I doubt they are put past the legal department before release, unlike the actual forms that applicants submit and the accompanying notes, which presumably are legally checked.

GS