Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest.
The latest GDP figures from the Office for National Statistics contain an interesting insight into our savings habits. They suggest that we can probably save more on an ongoing basis than we think we can.
We are all familiar with the excuses - we’ve all used them - about not being able to find the spare cash to invest after all the other unavoidable bills have been paid. For many people, this may still be the case - and, as post-furlough unemployment rises, we should not ignore their plight. For others, however, it’s a matter of priorities.
The second quarter was clearly an unusual period for the UK economy. Although a bit better than the first estimate, today’s more complete cut of the data still show the worst contraction on record, a decline of around a fifth in output, twice as bad as in Germany or the US.
But the most interesting item in the ONS’s report is about household savings. It shows that with lockdown measures closing many shops and restaurants, and restricting our ability to make discretionary purchases, people put aside a much bigger slice of their income than usual.
The average percentage of disposable income that was saved in the quarter rose from 9.6% in the previous three months to 29.1%. That’s a spectacular change and shows what might be possible if we rethink how we choose to spend our money.
Of course, no-one is suggesting that we should all become permanent stay-at-homes, refusing invitations to the pub and honing our sour-dough skills in the kitchen. For one thing, this would be a disaster for the economy and the jobs market.
But clearly, if we can shift overnight from saving a tenth of our income to almost a third of it then there is scope for putting aside more on an ongoing basis. Now is a good time to look at what we stopped spending our money on in the spring and asking ourselves whether we really need to go back to our old consumption habits.
In particular, young people might reassess whether they can get started with a regular savings habit by cutting out at least some of the more frivolous spending that we all succumb to. The pride of my 26-year old daughter at putting enough aside to secure her first flat (with a bit of help, I should add, from me and the government’s LISA scheme) has been gratifying to see.
We are all familiar with the power of compounding and the importance of starting to save early. I have written many times about the experience of two sisters, one of whom begins to save at age 18 and one who waits until she is 38. Whatever she does, the sister who waits can never catch up with her more prudent sister thanks to the combination of compound interest and time.
Even if the prudent sister stops saving altogether at the time her more profligate sibling starts her savings, she will stay ahead thanks to the interest that builds on the capital and interest she has already accumulated. It is a kind of financial miracle. Einstein allegedly called compounding the eighth wonder of the world.
Saving even modest amounts could not be easier thanks to the flexibility of regular savings plans. With as little as £50 a month, you can make a start. And if the money is paid out of your income automatically, you will quickly stop thinking about it as spending that you’re missing out on.
The pandemic has taught us many new things. People have reassessed their work/life balance, their physical and mental health, even their relationships. If they haven’t added their relationship with money to the list, maybe now is the time to do it.
My colleague Toby Sims has written a great series of articles aimed at young people getting into saving and investing for the first time. Read the first article in the series.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Eligibility to invest into an ISA and the value of tax savings depends on personal circumstances and all tax rules may change. This information is based on our understanding of the proposed LISA rules which may be subject to change. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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