According to the Bank of England’s Monetary Policy Report in February 2021, households across the UK have accumulated an excess stock of savings totalling £125 billion over the course of the pandemic. The BofE attribute this rise to the sharp fall in total consumption since the start of the pandemic and this being larger than the fall in household incomes. In short, people have been spending less and therefore saving more by default.
Whilst the Bank of England and the government will be hoping that a large proportion of this pent-up spending be injected back into the economy once it reopens, the evidence suggests that at least some of this will be retained by individuals, used to improve their financial positions or fund future savings.
If you are looking at revising your financial plan or making a new one coming out of lockdown, where should you start?
Establish your goals
Establishing savings goals is important for many reasons, including knowing how much to save and where to save it.
You might be saving for a short-term goal, such as a wedding or home improvements.
Perhaps your goal is medium term – like saving for a deposit on a house or buying a second home.
All of us should have a plan in place for long-term savings that will see us through retirement.
The nature of your goal will also impact on the vehicles you use for saving and the level of investment risk you are willing to take. Generally speaking, the longer the period of investment, the higher the level of risk you may be comfortable taking. This is because there is no immediate need to access the money so any falls in the value of investments will have the time to recover before they need to be accessed.
Having savings goals can also help to provide motivation along the way. Sticking to a financial plan isn’t always easy and knowing that you have hit certain target milestones can provide a sense of achievement and therefore provide impetus for doing more of the same.
Saving vs investing
Accumulating a lump sum in savings is a great start but due to the current low interest rate environment, where inflation rates exceed the rate of savings, there is a real risk that your money may devalue over time. There is always a risk with investing in stocks and shares, but the potential gains are worth weighing up. Those with a particularly risk averse attitude may want to start by investing a small proportion of their savings or looking at ‘lower risk’ categories of investment.
Keeping momentum up
Whilst it may have been possible to save during the pandemic, what will happen when things open up again and your spending levels increase?
If nothing else, months in lockdown has made us all consider what is important to us, the things we value most in our lives and the things we have missed (or perhaps not missed) whilst we haven’t been able to do them. Having had the opportunity to reassess, some of us may be willing to make sacrifices and change how we live now in exchange for a more certain future. For example, results from a survey by AA Financial Services found that respondents planned to boost savings coming out of the pandemic by cutting back on luxuries (30%), spending more time at home (37%) and cooking more (23%).
Starting on the financial planning path needn’t be ‘all or nothing’ and by being sensible and committed, it can be possible to have a balanced approach to everyday spending whilst still making a difference for the future.
Over and above the changes and commitments you can make yourself, putting a long-term financial plan in place is something that benefits from professional input. Whilst you can be helpful to do some of the groundwork on your own, the benefits of financial planning tend to build up over time, with those that begin their investment journey earlier being able to build up greater rewards. Therefore, doing the right things from the start; investing in the right ways, in the right tax wrappers and in the right amounts/proportions, can have a significant impact by the time you reach later life.
For more information on how we approach financial planning or to speak to one of our financial planners about developing a bespoke financial plan to suit your individual circumstances, please get in touch.
NB: The value of investments can fall as well as rise. You may not get back what you invest