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article imageOp-Ed: Save or spend? The recovery dilemma

By Alan Cairns     Sep 1, 2014 in Business
London - Over the last few years we've all been faced with a financial dilemma: save or spend? There's widespread awareness that debt caused the financial crash and if we don’t change our ways we could well be condemned to a life of poverty.
We've been sent conflicting messages. Spend our way to recovery. But save so it doesn't happen again. Spend because saving is worthless. But save because you're only one paycheque from destitution.
Hovering between a credit card application and an ISA form, what do you choose?
We want YOU to spend your money
Your Mum will always tell you to save. Of course she will. It's that kind of financial responsibility, coupled with an affordable property market that built a generation of homeowners. A bedrock of post-war security. But we live in a world of easy credit, liquid labour and sky-high prices. Besides, the government wants you to spend!
The best way to get the economy moving after a recession is to spend. If there's one thing we learnt from Keynes, that was it. That's why interest rates have been at record lows for so long: to make borrowing cheap to encourage consumers and businesses to take out loans and put more money in the system. More money means more jobs, which means more money which means more jobs; ad infinitum. Money breeds money.
Taken from the other perspective, favourable borrowing conditions also make unfavourable saving conditions. Interest rates have been so low — and inflation so high — that anyone with money in a savings product has actually been losing money until very recently.
And besides, unless you're lucky enough to have parents who can stump up the cash for a house deposit, you'll never own a home anyway. So what's to save for? Might as well indulge in gourmet frappuccinos and keep another struggling barista in employment, no?
But you need to save
Cracking your wallet open for the national cause is all very well — and you might pick up some choice trinkets along the way — but in the end, your Mum is always right. Saving is a good idea. Even if you'll never afford a house, you will retire at some point. And the state pension isn't going to cover the credit-fuelled, frivolous metropolitan lifestyle you've grown accustomed to..
Estimates vary as to how big a pension pot you'll need to top up your state income: annuities provider Just Retirement says around £160,000, while investment and pensions giant Fidelity say somewhere in the region of £340,000. Which puts it somewhere in between. Even if you're happy with the minimum, that's still a lot of cash you’ll need to avoid retirement poverty.
And you probably will get sick of paying rent after a while. Shared Ownership schemes and Help To Buy are currently putting first time buyers back in the game, so there are ways to get on the ladder. If you get a good enough mortgage, the difference between your rent and your monthly payments might even help towards your children's extortionate university education.
Like it or not, the future's coming. And a carpe diem approach to finance isn't going to pay for it.
Where to save
So where should that standing order go? If you have access to a workplace pension scheme, that's undoubtedly a good idea. On top of the percentage of your salary you pay, you get tax relief and (probably) employer contributions as well. And thanks to the magic of compound earnings, the earlier you start the more you end up with.
If you're self-employed or otherwise unable to contribute to a workplace scheme, a private pension is the most tax-efficient way to save, and the best way to make sure you've got something to draw on when you retire. That you can't access the money until you're at least 55 is more of a bonus than it sounds.
For a deposit on a crumbling townhouse in Tooting, you’ll need access to savings and consequently the Chancellor is keen to push people into ISAs; using the Budget to put the allowance up from £11,520 to a whopping £15,000. Rightly so you may think, by sidestepping tax on the interest you earn in an ISA, you effectively get an extra 20 percent on everything you earn.
Whatever you do, you'll get the best returns by saving or investing long term, and picking products designed for the purpose. Instant access savings accounts are great for 'rainy day' funds, but you won't see much growth on them.
Inflation is going down, savings products are actually making money again and the economy is on the road to recovery. Time to stop spending and start saving.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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