A guest blog by Chris Hancock, chief executive of Crowd2Fund.
You can download The Good Guide to the IFISA, co-sponsored by Crowd2Fund and Abundance Investment, here.
Last year was tough for anyone trying to save money.
Interest rates were cut to a record low of 0.25%, and inflation rose to 2%.
The latter is expected to continue to rise and could hit 4% in the near future.
A toxic mix of paltry returns, idle bank accounts, a sluggish buy-to-let market and the rising cost of living has left millennials feeling there are few alternatives to build anything even resembling “wealth”.
The knock-on effects of these macro economic headwinds is that savers of any age are having to hunt harder to find returns. Meanwhile, advice is costly, onerous and inaccessible.
The savings rate of leading current accounts and cash ISAs have been cut drastically, with the highest easy access cash ISA being around 1%.
This does not beat inflation. And if your returns do not at least keep up with the pace of inflation, the purchasing power of your savings and investments will diminish.
What has always been viewed as the safe option, ie. keeping your money tucked away safe in a savings account, shielded from any macro/market fluctuations, is now the option that will lose money.
On top of this, stagnant wages are making it tougher to enjoy life if you also want to set anything aside. Today’s young people have to seriously economise to provide for their futures, but they have little spare cash to economise with.
So, for younger generations keen on doing the right thing with their money, the absence of advice and attractive investment options, together with the sheer difficulty of saving in the first place, has made it challenging to know what to do, to say the least.
What’s the answer?
It’s time to actively invest rather than save (hands have been forced) to give your money value for the longer term.
Employing a double-pronged approach by cutting living expenses and investing the savings into something like the Innovative Finance ISA – the IFISA, may be a good strategy.
The IFISA is a new Government-approved P2P ISA, which can offer much higher average returns than traditional savings accounts, of around 8%.
One advantage of investing in an IFISA is that your money will be put to work, offering cash hungry, successful businesses access to the capital they need. The businesses then pay lenders back the money they have put in, with interest, generated by their additional revenues.
So as well as offering lenders higher returns, the IFISA is also injecting real stimulus into UK businesses and increasing liquidity in the market.
With IFISAs, you can pick the businesses you like from a selection offered by the platform and know that your money is going straight to that business.
For example, if you have a penchant for ethical investments you can gear your portfolio to businesses which have a positive environmental impact. Alongside, cash returns investors can also benefit from rewards – little thank you gifts from the companies – by investing above certain thresholds. For example, previously on Crowd2Fund, investors in Ruroc, an extreme sports brand, were sent free, limited edition helmets.
Chris’s top tips for budgeting to free up cash
Download the last three months of your bank statements as a CSV file and analyse your expenses. Make a note of any unnecessary or extravagant expenditure.
From this create a new monthly budget, focused on saving.
Switch Utility And Broadband
Unfortunately, consumer loyalty doesn’t pay. Get into the habit of switching your energy, gas and broadband every year to get the best deal and save hundreds of pounds.
Price comparison sites like Money Saving Expert and uSwitch enable you to have a view of the entire market at the click of a button and allow you to switch hassle free.
Shop Around For Everyday Essentials
When you see an offer, consider stocking up on a whole year’s worth of non perishable goods and everyday items like moisturiser and washing up liquid. MySupermarket is a website which will keep you up to date on offers throughout the year.
Then once the savings have started to add up….
Open your IFISA. Crowd2Fund’s IFISA allows investment of up to £15,240 in the tax year, into P2P businesses generating an average APR of up to 8.7%.
This is significantly higher than inflation, and outstrips the returns on offer from more conventional investments.
Investors should mitigate against risk by spreading their investments across a range of different businesses in varying sectors.
Opening up an IFISA is free, and it takes just a few minutes to register.
On the assumptions that the IFISA allowance in the current financial year is used in full, and that a return of 8.7% is achieved, this will result in a return of £1,326 over the calendar year.
Switch Existing ISAs
If you are fortunate to have cash ISAs from historic tax years, transferring them to the IFISA will allow you to receive a better rate of return than the 1% offered by cash ISAs.
Additionally, historic funds will benefit from compounding interest, making returns even higher.
It is possible to transfer any number of cash ISAs, from different providers, to the Crowd2Fund IFISA. All this requires is filling in a short form, which will instruct your old ISA manager to transfer your funds.