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Marshmallows and financial planning

The Stanford marshmallow experiment is one of the most famous pieces of social science research out there. It has arguably influenced the way that many people live their lives, in addition to providing plenty of fun and interest for those with young children who are in the ‘I’ll try this at home’ camp.

So what is the marshmallow test? 

A marshmallow is placed in front of a child, they are told that they can have a second one if they can go 15 minutes without eating the first one – then they are left alone with the marshmallow.

As you can imagine, many children ate the marshmallow as soon as the door closed, others fidgeted and wiggled as they tried to restrain themselves, eventually giving in. A handful of children managed to wait the entire time. 

Following the experiment, the children were monitored as they grew up and it was found that those who waited for the second marshmallow performed better in exams, had a lower likelihood of obesity, lower levels of substance abuse and their parents reported that they had more impressive social skills. 

In other words, it could be said that the ability to delay gratification is a trait that leads to valuable rewards in the future. 

So how does this relate to financial planning?

The results from the experiment can easily be applied to the way you save and invest money. Simply put, if you save rather than spend now, you’ll gain greater rewards in the future. 

How do you delay gratification?

Cutting out frivolous and impulsive purchases are a good start. Think to yourself: ‘do I really need this?’ Do you have to buy a coffee from the coffee shop near work? Do you have to eat out twice a week? Small acts of restraint can lead to a big pay off in the future. 

When it comes to building a financial plan, it’s important to identify the levels of savings required for achieving goals in the future. Are you aiming for an early retirement or buying a holiday home? Setting out these goals early and developing a plan will help you to streamline your saving strategies so that you remain on track. Just remember, one marshmallow now or many marshmallows later.   

Whatever you want to purchase: a boat, a house or a car, delayed gratification is an extremely valuable skill to learn when it comes to achieving your financial milestones. The more you see your savings grow, the more motivated you will be to keep going. It’s good to see your hard work pay off and over the span of a few years, you could see dramatic increases in your wealth and financial security.

Sources
https://www.huffpost.com/entry/40-years-of-stanford-rese_b_7707444 guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAJdHRHqhlsVcLeV6Yi_w61XPEFBayOqdTK89gxGCEdCpDt8CZVAn9Nrzg_branVU7Z0eWhyD4CjX0ii8uQzgVRE2OrG17sknh-B4t_HwD35qNwzcMVc6QLH9ijLjmwCnjIQmyUvHDPtR5bme9Zu4p977cA_h2r1GWY6VIKl6hnAx&guccounter=2
https://www.theatlantic.com/family/archive/2018/06/marshmallow-test/561779/
https://www.businessinsider.com/delayed-gratification-helped-me-save-money-2019-3?r=US&IR=T

The generation gap in savings might be wider than you think…….

A new report by Scottish Widows (SW) has found that savings habits among younger people are rather lacking when compared with older generations. 

14% of people aged 20-29 are not saving any money, whereas 20% are saving between 0-6% of their wages and 26% are saving between 6-12%. That leaves only 40% of people between the ages of 20 and 29 making what SW deems to be ‘adequate’ savings (12% and upwards). 

The figures differ for those over 30 where 59% of savers are saving adequately. 

Scottish Widows outlines that the central problem with savings in the UK is that people simply aren’t saving enough. This could be attributed to the decline in defined benefit pension schemes and wider economic challenges. Though progress has been made, with record highs in the adequate savings category, according to SW, this is still not enough. 

The lower level of savings among younger people is likely to be a reflection of differences in priorities. SW’s study found that 45% of younger savers (under 30s), the highest of any age group, are saving towards medium-term goals such as buying a house. 27% were found to be saving for the long term and 28% were saving for rainy days. 

SW notes that the savings gap for young people “is perhaps unsurprising but nonetheless worrying.” Those under 30 are at a time where long-term saving can be hardest, yet investment growth can be advantageous. SW outlines how younger people are missing out on “the power of compound growth.“ 

They later go on to present four interlocking issues that have led to this general lack of savings made by younger generations:

  • Most people remain disengaged with long-term savings – 38% of people are not aware how much they are saving 
  • Financial pressures – 28% of individuals earning between £10,000 – £20,000 say they’re not saving at all
  • Self-employed individuals are being left behind – 41% of the self-employed aren’t saving at all
  • Home ownership is a struggle for young people – 56% of 20-29 year olds say they have not saved for a deposit

Scottish Widows then set out a number of reforms that would benefit savers: 

  1. Raise pension contribution rates – a new level of 15% to give people a chance to maintain their quality of life during retirement
  2. More flexibility between pensions and property – including the ability to use some retirement savings to help with the purchase of their first property
  3. Create better education and guidance – which includes information on the role of property and pensions in retirement
  4. Provide a hardship facility – allowing some savings to be used to avoid problem debt
  5. Ensure the self-employed have access to similar benefits as those in employment

Though there are marked improvements from last year’s report, it seems there is still a long way to go in terms of saving habits in younger individuals. As suggested above, there may even be a requirement for governmental reform in order to achieve the goals that Scottish Widows have set out.

Sources
https://adviser.scottishwidows.co.uk/assets/literature/docs/56868.pdf?utm_source=1034930&utm_medium=paid+social&utm_campaign=22953005&utm_content=250845013&utm_creative=118592721

Cash versus bonds, which is safer?

Protecting and growing wealth is often one of the main objectives clients have. There are many investment opportunities out there that are described as ‘safe,’ but many individuals feel that cash is the safest option for them. Keeping your money in your account is an appealing option, as you know exactly where it is and can access it at any time. However, it may be worth looking into the other investment options available to you. 

Here’s some more detail of the cash versus bonds debate.

The benefits of cash

The main benefit, of course, is that you maintain complete control over your money. You simply deposit it into your bank account and there it remains. You can then review your balance and transaction history easily, knowing that no one else has access to those funds. 

Cash is available for those rainy days or times when emergency funds are required – it gives you flexibility. 

The risks of cash

Inflation is one of the biggest risks to cash. According to the ONS, the 12 month inflation figure as at June 2019 was 1.9%. This is the rate your savings require just to maintain their buying power, anything less than this and you are, in effect, losing money. 

The second risk surrounds what are referred to as ‘opportunity costs’. These are the potential profits that could have been acquired if your money had been used differently. Since holding cash generates relatively little profit, the opportunity cost could be quite high. 

It is generally prudent financial planning to always hold some cash for quick access and ‘emergencies’. Understanding just how much will be dependent on personal circumstances. Like all investments, there can be a risk of holding either too much or too little cash.

The benefits of bonds 

Unlike cash, investing in bonds offers the benefit of consistent investment income. Investing in a bond is similar to making a loan in the amount of the bond to the issuing entity – a company or government. In exchange for the loan, the issuing entity pays the bondholder periodically. The income generated by bonds is generally stable and quite predictable, allowing for robust financial planning. Once a bond matures, the issuing entity pays the bondholder the par value of its original purchase price. 

The risks of bonds 

The main risk of bond investing comes when the investment loses value. If the issuing entity defaults, you may lose some or all of the investment. It’s important to note, however, that bonds are rated to measure the credit quality of any individual bond. The higher the rating, the lower the risk. Government bonds tend to receive the highest ratings.

A bond might also lose value if interest rates rise. However, this is only a concern if a bondholder is looking to trade it in before the bond reaches maturity.

Sources
https://www.investorschronicle.co.uk/portfolio-clinic/2018/08/30/think-carefully-about-swapping-cash-for-bonds/
https://www.fool.com/how-to-invest/a-quick-guide-to-asset-allocation-stocks-vs-bonds.aspx
https://www.investopedia.com/articles/investing/103015/cash-vs-bonds-what-pick-times-uncertainty.asp

20 years after the ISA was launched, what does the future hold?

A study by the Yorkshire Building Society found that savers deposited £4.3bn into ISAs in the final week of the 2017/18 tax year, and the tax year just gone (2018/19) was set to see a similar final week deposit of up to £4bn. This was despite the number of ISA holders falling from 11.1m in 2016/17 to 10.8m in 2017/18.

ISAs, therefore, are continuing to be attractive.

They were launched two decades ago as a tax-free alternative to traditional savings accounts which failed to offer an interest rate that competed with the rate of inflation. At its advent, the total tax-free allowance was £7,000, but at least £4,000 had to be invested in funds, meaning the maximum you could save in a cash ISA was £3,000. Since then, the ISA portfolio has grown to include Help to Buy ISAs, Innovative ISAs and Lifetime ISAs. In addition to this, the tax-free saving allowance has increased, and today, savers are allowed to deposit up to £20,000 into their ISAs each tax year, tax-free.

That means no interest tax, no income tax and no capital gains tax. Cash ISAs also offer access to funds as easily as regular savings accounts and are an excellent choice when it comes to choosing a default savings account.

Take-up appears to be declining amongst younger generations, though, as the total number of adults saving into an ISA fell from 11.1m in 2016/17 to 10.8m last year. With so many opportunities available to young people these days, perhaps it shouldn’t be so surprising that saving into an ISA is losing its appeal?

How can ISAs evolve to maintain appeal?

Clues may lie within the rise of Open Banking, as digital money apps have empowered many people to manage their money more actively.

These apps play a huge role, although it could be suggested that financial education should begin at a very young age. Encouraging young people to invest for the long term requires knowledge of the difference between investment and saving.

Einstein famously said that: “The definition of genius is taking the complex and making it simple,” and it would be unwise to underestimate the importance of simplifying language. The financial sector is awash with acronyms and savings jargon, creating potentially confusing barriers to entry for savers.

Some financial advisers have called for a more holistic approach and to examine how other industries are driving long-term behaviour change. Think of how the music industry changed the way we purchase and listen to music with digital distribution and online streaming platforms such as Spotify.

Ross Duncton, head of Direct at BMO Global Asset Management, says that a ‘revolution is due for the savings and investment industry – with ISAs centre stage.’ After all, if savings options were to remain the same for the next twenty years, the steady decline of ISA uptake will only continue.

Sources
What Investment – Issue 434 May 2019
https://moneyfacts.co.uk/news/savings/billions-of-isa-savings-expected/

Why investing your money is more profitable than leaving it in a bank account

You’ve worked hard to accrue your wealth, so naturally you’ll want to see your finances flourish and develop. That raises the question: how best should you grow your finances?

Many people are drawn to banks to save their money, opting for the chance to get some interest and their money back. But in a time of rising inflation, you may be watching your money devalue over time. The wealth of many people in the UK is under threat, as inflation has risen past interest rates to slowly reduce your money’s buying power.

With inflation vastly outstripping savings account returns by 2%, it may be time to seek out other more valuable options to invest. Michael Martin of Seven Investment Management told the Financial Times that at the current rate, a £100,000 lump sum will fall to £81,790 in just ten years.

However, every year we’re reminded that equities are far more likely to produce higher returns than cash deposits. The most recent Equity Gilt Study released by Barclays found that since 1899, British stocks have returned 4.9% a year in real terms, compared to 1.3% for gilts and 0.7% for cash. Over the last decade, the respective figures are 5.8% for stocks, 2.7% for gilts and a miserable -2.5% for cash.

An investment kept for five years at any stage has a 76% chance of outperforming cash, which is no small margin. However, if you extend the holding period to ten years, the figure climbs up to a dizzying 91%.

The Barclays study also found that reinvesting income dividends is crucial to long-term returns. If you had invested £100 in UK stocks at the end of 1945 without reinvesting the dividends, the amount would now be worth £244 after inflation.

Ian Cowie, Personal Account columnist for the Sunday Times, says that shareholders “benefit from improvements in efficiency and inventions that occur over time.” Meaning that, as companies innovate and grow, the situation becomes mutually beneficial.

With cash suffering from a steady decline as time goes on, it may be better to look towards other avenues of financial development as a way to diversify your savings and help them grow.

The value of investments or income from them may go down as well as up. As stocks and shares are valued from second to second, their bid and offer value fluctuates sometimes widely.

Sources
https://www.moneyadviceservice.org.uk/en/articles/should-i-save-or-invest
https://moneyweek.com/505257/stocks-beat-cash-and-bonds-over-the-long-term/

Generation X is failing to save for their pensions

With rising costs of living affecting the way we live our lives, it seems that pensions have taken a back seat for some. Workers in their forties and fifties from generation X have left the organisation of their pension to the last minute, with many savers now pouring money into their pots, trying to make up for lost time.

According to a study carried out by Salisbury House Wealth (SHW), Gen X accounted for 43% of all UK pensions savings in 2018. This marks a dramatic surge in savings, increasing by 14% from the previous year, making up £3.7bn of the £8.5bn saved during the course of the year.

Tim Holmes, managing director of SHW, said: ‘Many individuals in generation X are finding their incomes squeezed by having to pay for both younger and older dependents. As a result, pensions will likely only become a priority at the last minute.’ Tim later goes on to point out that although it may seem wise to leave saving to a later date, your investments may not have enough time to grow.

This seems to link with the white paper produced by the Financial Conduct Authority (FCA) earlier in May on intergenerational differences. The paper noted that between 2014 and 2016, people aged 40 to 50 had less total wealth when compared with people of the same age 10 years earlier. The FCA has suggested that an open debate is required in order to understand the specific challenges that these particular age groups face.

Older people are living longer as life expectancy increases. Baby boomers are having to develop new financial strategies to maintain living standards in later life whereas younger people are struggling to build wealth due to rising house prices, insecure employment and student debt.

The FCA points out that Gen X are likely to be financially stretched, as they are torn between the responsibility of helping older generations in later life whilst also providing financial support for younger generations, leaving less money that can be set aside for their pensions.

Christoper Woolard, executive director of strategy and competition at the FCA, says that from ‘baby-boomers to generation X to millenials – everyone’s financial needs and circumstances are evolving. It is clear that each generation will have its own challenges.’ He goes on to say that now is the time to ‘step back, consider and understand how these needs are evolving and challenge assumptions about customer needs in the context of intergenerational factors.’

What does it take to retire early?

The idea of retiring in your 50s or even your 40s sounds like a pipe-dream to most, what with the increased cost of living, inflation and other economic factors slowly eating away at your predicted earnings. This hasn’t stopped the rise of the FIRE (Financial Independence Retire Early) movement, though, a new method of frugal living that aims for early retirement, escaping long working lives and living off the stock market or other supplementary income for good.

One of the most infamous experiments carried out by Stanford University is the marshmallow experiment, where a pair of psychologists gave children a choice: one reward now, or two rewards if they waited around 15 minutes. Some of the children took the early reward of a marshmallow. Others struggled, but managed to wait longer, occupying themselves until it was time to receive a double reward.

Saving for retirement can be very similar to the lesson in delayed gratification, only more difficult. The children knew what reward awaited them should they be patient – most adults don’t have a clue if their savings will be enough for the future. When the reward is intangible or complicated, it’s even more difficult to set limits now in the hope of future benefits.

So, how do you do it?

Keep your spending in-house

From small seeds of saving do sturdy trees of retirement grow. Simply put, it’s good to aim small when beginning your savings journey. That £2.65 coffee from your local coffee shop is now going to be an instant in the office. No more eating out for lunch, it’s time for homemade meals to be brought into work with you. Cutting out the small daily expenses can really help boost your long term savings and help usher in that desired early retirement. Let’s take our £2.65 coffee for example, the average UK citizen works around 260 days a year – that’s £689 a year!

Utilise technology

There are a number of apps available, such as Moneybox, that make some basic assumptions about stock market returns and inflation rates which then inform you as to how much you’ll need to save. Having a handy app on your phone can help you make decisions on the fly and allow you to check what a potentially impulsive purchase may cost you in the future.

Shop around

Saving money where you can on bills, transport and other outgoings can help to grow your retirement pot quickly and without too much skin off your nose. Ask yourself whether you really need that magazine subscription or streaming service. Can you find a better deal on your phone or energy contract? The answer is often yes.

Take advantage of saving opportunities

The government has recently introduced a new Lifetime ISA open to those aged between 18 and 40. LISA account holders can save up to £4,000 a year, with the government adding an annual 25% bonus up to a maximum of £1,000. There is a limit, however. You won’t be able to contribute to a LISA or receive the bonus when you turn 50, but the account will stay open and your savings will continue accruing interest or investment returns. For more information on the terms of withdrawal and eligibility, check out this government’s guide.

Decide what your goals are

Ready for some serious saving? Pretirement is an app developed for the financially-inclined who want to put away small savings over the long term in order to save for a holiday or a new car. Their headline claim, using their clever algorithm, is that by saving £800 a month towards your retirement, you shave years off your working life, depending on what your retirement goals are.

And there’s the big question. What are your retirement goals? Do you want to live a life of luxury, enjoying all the potential freedoms that your new found free time will have to offer? Or would you rather have a comfortable yet frugal retirement. There’s a whole range of options available to you, and your retirement goals will help to inform you of how much you need to save and invest. A financial adviser can be a great help in determining this factor as they can give you direction on what the ideal savings plan is for you.

At the end of it all, the message is to save when and where you can. It’s about growing your savings and securing your finances.

Why easy access savings accounts are a bad idea

We’ve all been there, the boiler breaks, the car decides that today is not its day or a bill appears out of nowhere. For these sudden expenses, you need to have access to your money.  The UK has favoured instant access savings accounts for a good while now, with a staggering 77% of cash savings now being held in these easy access savings accounts.

Convenience is a wonderful thing, however there are a number of drawbacks to keeping your cash at your fingertips. The very best of these easy access accounts currently pay up to 1.5% interest AER (Annual Equivalent Rate). If you’re one of the millions of people who are trying to save with bigger high street banks, you’ll be receiving a whole lot less. In some cases, saving rates with big banks can be as low as 0.15% (29/05/19), which we can all agree is monumentally low.  

What should you do?

Easy access savings accounts might seem like the most uncomplicated way to keep your cash. The truth is, though, few of us really need to keep our cash instantly accessible.

A healthy blend of instant access and fixed-term savings could significantly boost your returns, whilst keeping that rainy day fund safe, in case of emergencies. That’s why it’s worth splitting your savings in two:

Emergency cash – money to be put to one side in case of loss of employment, home repairs or other unforeseen expenses. For most of you, this will be within the region of three to six months worth of income held in an instant access or current account.

Long term savings – you may have your eyes on a big expense in the future. You might be getting married, buying a new house or planning a trip around the world. Whatever it may be, putting your cash into a fixed term savings account is one of the best ways to grow your savings. You can keep your cash in a fixed term account from between 3 months and five years.

The general rule is that the longer you keep your cash in a fixed term account, the higher your rate. You may even be able to reach the dizzying heights of 2.5%!

With the national inflation rate currently set at 1.9%, saving has become more important than ever if you want to secure your future finances. For more information on what style of saving would suit you, don’t hesitate to get in touch.

The UK is struggling to save; what are the implications?

study found in 2018 that one in four adults have no savings. Many residents in the UK wish that they had cash to save, however high monthly outgoings and debt clearance seem to take priority. Saving for the little curveballs that life throws your way is a good way to maintain a sound mind, but poor money management and large monthly payments can get in the way. So is this issue localised to the UK, or is the struggle to save an international issue?

Across the pond

Households in the US are currently able to save 6.5% of their disposable income, down from the previous figure of 7.3% after estimates were made by Trading Economics. However, earlier in 2018 a report was made, finding that 40% of US adults don’t have enough savings to cover a $400 (est £307) emergency.

The current UK savings figure sits at 4.8%, one of the lowest since records began in 1963. The Office for National Statistics has come up with an even lower figure of 3.9%, which actually is the lowest recorded. Further to this, a report was also made by the Financial Conduct Authority in 2017 that millions of UK residents would find it difficult to pay an unexpected bill of £50 at the end of the month, and little has changed since then.

Closer to home

In France and Germany, the savings ratio sits at 15.25% and 10.9% respectively, that’s triple the UK’s value for France and over double for Germany! The Managing Director of Sparkasse bank points to cultural ideals as the main influencers for the high German saving rate, saying that: “Saving is seen as the morally right thing to do. It is more than simple financial strategy.” This stance seems typical for the country that’s home to the first ever savings bank, opening in Hamburg in 1778.

Why do we not save as much as we used to?

The idea of saving for a rainy day in the UK may not be totally lost but for many, the rainy days are happening as we speak. Another reason relates to the tendency of UK households to borrow more money in order to maintain lifestyle choices. For all quarters in 2018, households were net borrowers, drawing on loans and savings to fund spending and investment decisions.

Comments have been made referring to current Brexit uncertainty as a reason for the change, alongside rising rental prices and increased costs of living. Whether this new change in spending and saving is wholly due to current cultural or economic factors is yet to be confirmed. Another case has been made for poor interest rates making it a less lucrative option for savers to save.

Be it cultural or economic, it is undeniable that the country has lost faith in the ethos of saving their pennies. In the end, as more and more studies come to light, it seems that only time will tell.

Sources
https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/expenditure/bulletins/familyspendingintheuk/financialyearending2018
https://www.independent.co.uk/news/uk/home-news/british-adults-savings-none-quarter-debt-cost-living-emergencies-survey-results-a8265111.html
https://eu.usatoday.com/story/money/personalfinance/budget-and-spending/2018/09/26/how-much-average-household-has-savings/37917401/
https://www.bbc.co.uk/news/business-46986579
https://www.ft.com/content/c8772236-2b93-11e8-a34a-7e7563b0b0f4

What to know about ISAs in 2019/2020

The rules around ISAs (or individual savings accounts) change relatively often and different types of ISA rise and fall in popularity depending on where savers consider the most competitive place to put their hard earned money.

ISAs are a great way to save because of their tax efficiency. You don’t pay income tax or capital gains tax on the returns and you can withdraw the amount any time as a tax free lump sum. Because of their tax efficiency, there are set limits on how much you can save using ISA accounts.

The 2019-20 tax year is an interesting year for ISAs because the main annual allowance isn’t increasing. The yearly total you can invest in an ISA remains at £20,000. This means that the ISA limit remains unchanged since April 2017.

Remember that all ISAs don’t have the same allowance. For Help to Buy ISAs, you can only save a maximum of £200 a month, on top of an initial deposit of £1,200. Lifetime ISAs (LISAs) have a maximum yearly allowance of £4,000, on top of which you benefit from a government top-up of 25% of your contributions.

One ISA allowance that is rising (slightly!) is the Junior ISA, increasing from £4,260 to £4,368. This means that relatives can contribute slightly more to a child’s future, in a savings account that can only be accessed when they reach 18. Junior ISA accounts are rapidly gaining in popularity, with around 907,000 such accounts subscribed to in the tax year 2017/2018. Great news for the youngest generation!

Stocks and Shares ISAs are also gaining more popularity, with an increase of nearly 250,000 in the last tax year. On the whole, though, the number of Adult ISA accounts subscribed to in the last year fell from 11.1 million in 2016/17 to 10.8 million in 2017/18.

For investors with Stocks and Shares ISAs, Brexit uncertainty has understandably created cause for concern. In this scenario, your best course of action is to make sure that your investments are properly diversified around the globe. Speak to us if you are unsure about what you can do to reduce risk during any post-Brexit turbulence. We’ll be more than happy to help.

Sources
https://blog.moneyfarm.com/en/isas/annual-2019-isa-allowance