Monday, March 5, 2012

Become the God of Frugality

Sometimes, you have to save a little to gain a lot. When we have money in our pockets, it can be all too easy to feel it burning a hole and be tempted to spend it straight away, even though we know it might not be in our long term interests. By contrast, making ourselves save money can take willpower – but the results should be more than worth it in the end.

This is one of the big reasons the stocks and shares ISA has grown so much in popularity: many people are drawn by the ability to save a significant sum of money each year absolutely tax free, meaning it is possible to maximise the money you put in and make your savings work as hard as they possibly can. These ISAs were first introduced more than a decade ago to replace previous tax-incentive saving schemes, with the aim of encouraging the country to save more.

Since then, their popularity has exploded, particularly among younger people. One of the reasons tax efficient savings work so well for young people is that they can be extremely useful when saving for a mortgage deposit – this is something that many of us do at some point in our lives, and it can often be a challenge to scrape together the cash. This means that any help we can take advantage of, we definitely should.

The way a share ISA works is by investing your money in stocks and shares. Depending on the kind of ISA you have, this could be invested in all the companies listed on the FTSE all-share index, in companies that have a lower than average carbon footprint, or in government gilts. If the shares you have invested in make a profit, so do you, which you receive in the form of dividends.

This can be a good way to get a good return on your money without having to work very hard – and if you’re trying to be frugal, this is sure to be very welcome! However, it is worth noting the risk associated with these ISAs, due to the fact that the value of shares can go down as well as up. Over the longer term, however, there is a good chance that your money will grow and if you choose your shares ISA wisely, you’ll have an even better chance of this.

In the first seven years of ISAs being on the market, the number of people aged under 25 who signed up for one went up by a massive 88%, perhaps highlighting the attractiveness of the tax efficient savings for the younger generation. The ISA tax allowance stands in contrast to other savings products, which usually charge you tax on your interest at the standard rate – which isn’t that great for anyone on a frugality drive or for anyone who is simply trying to make their money work as hard as possible.

Overall, shares ISAs can be a very useful product if you are looking to make the most of your savings and want to limit your tax liabilities. They are particularly useful if you are saving for something significant, so anyone looking to buy a house any time soon would definitely be wise to see what’s available.
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