Five ways to boost your savings

 

 

LONG-term investments are not always a good idea: many people who are sold 25-year plans soon realise the folly of their ways.

Having a disciplined monthly savings or investment plan and sticking to it over a long period of time is always advisable, but some contractual schemes should come with a wealth warning.

Non-residents in the Gulf region are often well advised to hold their money offshore. Typically run from well-known tax havens such as the Channel Islands, Isle of Man and Ireland – where a higher proportion of your money is protected by law – investment accounts are predominantly made up of two types of plans: contractual and flexible (non-contractual).

Flexible investment plans are the ideal place for people looking to make hay while the sun shines, and are not very active investors after making their initial deposit. Here, you still receive returns on your money, in line with how underlying investments perform, but can withdraw funds within allowed limits penalty free.

However, these may not be the most ideal vehicle for longer-term investors. Contractual plans reward investors with generous bonuses for tying their money up.

In many cases, though, these people are encouraged to set a term for as long as 20 or 25 years, often with false assurances that you can take your money out early without penalty.

Be particularly aware of an ‘18 month plan’ with a 25-year term: if you sign up for this, you’ll have agreed to make every payment due from the date of inception until the specified maturity date and not simply for the first 18 months.

If you don’t meet this requirement, you will most likely be liable to pay penalties and these could wipe out any investment returns – and some of your initial capital – upon encashment.

Follow cashy’s five-point guide to avoiding the pitfalls and making the most out of regular savings:

Invest regularly to achieve objectives
A disciplined savings approach leads to optimal benefits. Take for example, an endowment policy for the purpose of repaying a loan or a property purchase upon maturity.

You keep up your monthly contributions for the full term of your policy to maximise your chances of achieving this goal rather than discontinuing the endowment policy with potential exit penalties.

Similarly, an offshore investment plan can create the incentive to maintain the payments and, therefore, achieve the original objective.

… and boost your returns
In addition, saving regularly can significantly boost your returns. This is due to what is known as ‘dollar cost averaging’.

World stock and bond markets inevitably go up and down, but by regularly drip-feeding money into your chosen investments, you are able to smooth volatility and mitigate risk.

This is for two reasons: when markets plummet, you’ll merely be getting more for your money, and as you’ll be committing funds on a regular basis you don’t need to worry about investing all of your savings at the top of the market.

In this way, dollar cost averaging means that you don’t have to concern yourself with fluctuating markets or identifying the best time to invest.

Know what you can afford
In financial planning terms, it’s important to cover short-, medium- and long-term objectives. Here, much is based on what you can afford.

If you know you’re going to need some of your money in the shorter-term, then don’t commit to investing large amounts over the longer-term or the penalty may outweigh any benefits.

Don’t lock in for too long
Offshore contractual investment plans can be a good option for those who can view long-term savings with a degree of certainty.

This type of product, with its locked-in commitment to long-term savings, is incentive in itself to build wealth for the future.

However, in many cases, a five, 10 or 15-year term is long enough to commit for.

Seek sound advice
It’s best to be aware of all the risk factors when taking out a contractual plan and understand the commitment. Always ask to see your adviser’s qualifications and how long they have been qualified for within the offshore market.

Find out the reputation of the company they work for, and make sure that it has all the correct licenses in place to be providing financial advice.