Investing For Financial Health
Accumulating an emergency fund Building it up You should have at least one month's income in your cash reserve, preferably more.
The alternative, only applicable if you are paying off debt or building up your reserve, is a borrowing facility that is a source of emergency finance from somewhere else.
This could be a bank overdraft facility or unused credit card balance.
The trouble with these facilities is that if you use them they are expensive, so you need to build up your emergency fund as soon as possible.
Another potential facility is your immediate family; would your parents, for example, be able and willing to make a temporary loan? Depositing it safely Use a bank or building society deposit account.
Instant access is best, even though higher rates of interest may be available on notice accounts, because the money might e needed in a hurry.
Higher rates are usually available on higher amounts, so it is worth using the same account for any short term savings such as for your holiday.
Postal and Internet accounts often offer higher rates.
Rates change and it is important to check regularly.
Comparable rates can be found in newspapers, money magazines and on the Internet.
Compare rates of interest by using the AER (annual equivalent rate) to take account of the timing of interest payments.
Providing for special events These are usually saved for out of income but there is no reason why a lump sum cannot be used.
Special events are normally short term occurrences, so the money saved for them is usually put in a deposit account; if added to your emergency fund in the same account, a higher rate of interest may be obtained.
If the event is more than three months away, a period notice account might earn more interest.
If it is as much as over a year away, then a fixed interest term deposit could be appropriate.
A period in excess of three years opens up the possibility of National Savings or gilts but a minimum period of five years is recommended for an equity based investment.
Financing your children's education This is another area where savings are normally made out of income but again a lump sum can be used.
The object is to create income of a specified amount (plus inflation) for a specified future period.
Take account of each child separately and, in the case of private schooling, do not commit your investment to a particular school.
In this case, if you start early enough, an equity based investment is worth considering, although as the due date gets nearer a gradual switch to fixed interest would be sensible.
Place your investments in an ISA wrapper if you are not already using your joint annual ISA allowance.
In the case of fixed interest, tax free National Savings are worth considering if you are not already utilising your full allocations.
Zeros (zero dividend shares from a split fund) are often recommended, as they have a known repayment amount.
They also have a known termination date, so a zero can be selected to fit in with your requirements.
It is worth getting independent financial advice and AEL, there are specialists in this area.
Dealing with your mortgage Using a lump sum to pay off your mortgage is low on the list of financial health priorities because interest rates on mortgages are lower than for other loans.
However, the return you get in the form of interest saved is greater than you can get on any investment unless it is very risky, so it is in effect a sensible investment.
There is some advantage in retaining a minimal mortgage because, should it be necessary to take one out in the future, it would make it easier to get and there would be fewer formalities.
Also the lender will retain the deeds of the property, usually without charge, which can be convenient.
If you have an endowment mortgage, do not surrender (cash in) the endowment policy, as you will get a poor return.
It is better to keep paying the premiums until maturity, the less satisfactory alternatives being to make the policy paid up or to sell it on the second hand endowment market.
The alternative, only applicable if you are paying off debt or building up your reserve, is a borrowing facility that is a source of emergency finance from somewhere else.
This could be a bank overdraft facility or unused credit card balance.
The trouble with these facilities is that if you use them they are expensive, so you need to build up your emergency fund as soon as possible.
Another potential facility is your immediate family; would your parents, for example, be able and willing to make a temporary loan? Depositing it safely Use a bank or building society deposit account.
Instant access is best, even though higher rates of interest may be available on notice accounts, because the money might e needed in a hurry.
Higher rates are usually available on higher amounts, so it is worth using the same account for any short term savings such as for your holiday.
Postal and Internet accounts often offer higher rates.
Rates change and it is important to check regularly.
Comparable rates can be found in newspapers, money magazines and on the Internet.
Compare rates of interest by using the AER (annual equivalent rate) to take account of the timing of interest payments.
Providing for special events These are usually saved for out of income but there is no reason why a lump sum cannot be used.
Special events are normally short term occurrences, so the money saved for them is usually put in a deposit account; if added to your emergency fund in the same account, a higher rate of interest may be obtained.
If the event is more than three months away, a period notice account might earn more interest.
If it is as much as over a year away, then a fixed interest term deposit could be appropriate.
A period in excess of three years opens up the possibility of National Savings or gilts but a minimum period of five years is recommended for an equity based investment.
Financing your children's education This is another area where savings are normally made out of income but again a lump sum can be used.
The object is to create income of a specified amount (plus inflation) for a specified future period.
Take account of each child separately and, in the case of private schooling, do not commit your investment to a particular school.
In this case, if you start early enough, an equity based investment is worth considering, although as the due date gets nearer a gradual switch to fixed interest would be sensible.
Place your investments in an ISA wrapper if you are not already using your joint annual ISA allowance.
In the case of fixed interest, tax free National Savings are worth considering if you are not already utilising your full allocations.
Zeros (zero dividend shares from a split fund) are often recommended, as they have a known repayment amount.
They also have a known termination date, so a zero can be selected to fit in with your requirements.
It is worth getting independent financial advice and AEL, there are specialists in this area.
Dealing with your mortgage Using a lump sum to pay off your mortgage is low on the list of financial health priorities because interest rates on mortgages are lower than for other loans.
However, the return you get in the form of interest saved is greater than you can get on any investment unless it is very risky, so it is in effect a sensible investment.
There is some advantage in retaining a minimal mortgage because, should it be necessary to take one out in the future, it would make it easier to get and there would be fewer formalities.
Also the lender will retain the deeds of the property, usually without charge, which can be convenient.
If you have an endowment mortgage, do not surrender (cash in) the endowment policy, as you will get a poor return.
It is better to keep paying the premiums until maturity, the less satisfactory alternatives being to make the policy paid up or to sell it on the second hand endowment market.
