Saving and investing basics

Saving: A timeless habit
Despite the borrowing options open to the over 18s today, saving is still the best way to buy anything you need. Not only do you stay out of debt (which means you won't have to pay interest), but by saving you can earn interest instead. Although currently savings rates are not that high, it’s still a habit worth getting into.

Even if you’re not saving for anything in particular, putting money into a savings account each month – even if it's just £10 or £20 – is a great habit. Having a little bit of cash to fall back on gives you choices and freedom.

But stashing your cash under your mattress, or even in your everyday current account, is no good as you won't be earning interest on it. Instead, put your spare money into the right savings account.

Where should I save?
As soon as you hit 16 you will have to save in an adult's account where, unlike most children's accounts, tax is payable on any interest you earn. However, the taxman does allow every resident adult in the UK to save a certain amount tax free in an ISA (Individual Savings Account). For this reason, an ISA is always a good place to start saving.

You can currently save up to £7,200, of which up to £3,600 of that allowance can be saved in cash with one provider. And from 6th april 2010, you'll be able to save up to £10,200 (of which £5,100 can be saved in cash with one provider). The rest can be invested in stocks and shares with either the same or a different provider. But make sure you find an account that pays the best rate of interest by doing some research. Think about how long you can tie your money up for. Generally the longer you’re willing to tie it up for, the higher the rate of interest you will receive. But beware, as if you find you need to get to your money quicker than you thought, you may need to pay a penalty fee.

What's best for you?
If you're lucky enough (or just work hard enough) to have more than £7,200 each year to put aside, it's time to look at other kinds of savings accounts. A regular saver with instant access to your funds is the most straightforward, though it may not pay the best rates of interest, especially if you don’t save the minimum required each month.

If you don't need access to your money for a year or two, fixed-rate bonds tend to pay better rates of interest. But if you change your mind and withdraw your money during the term of the deal, the interest earned could be wiped out entirely.

You may also prefer to use an online savings account but – especially if you’re already prone to internet spending – bear in mind just a click of a mouse could undo all your hard work.

Most people never have to worry about this but if a bank or building society goes bust, the Financial Services Compensation Scheme (FSCS) can pay 100% of the first £50,000 of an eligible depositor's claim, per authorised institution. If you hold accounts with two or more firms covered by a single authorisation, then the FSCS will only pay up to the maximum limit of £50,000. For example Abbey National and Alliance & Leicester are both authorised under Abbey National plc, so if you have an account with both firms, you would still only be covered once.

See the table on our Moneymadeclear website to see which firms come under which authorised groups.

For more information on savings for young people, look at Savings – next steps.

Investing on the stock market
When it comes to money management, saving is always the best place to start. But while the process is rewarding, it’s slow and steady too. That's why, in addition to their savings, some people choose to invest some money. Essentially, investing is saving for the medium to long term (usually over five years) but with the hope of getting a better return. It may be an option for young people, students and graduates to consider. However, always check the company or adviser you’re dealing with is authorised by the FSA by checking our Register – see the link below. Protect yourself. Investments can provide an opportunity for your money to grow, but there are risks involved. You need to be clear on what the risks are before you commit to an investment product.

You can invest in different ways, for example buying shares in companies. But there are other options such as property and fixed-interest investments (where you investment is, technically, a loan of money to companies or the government and get interest in return). But investing is a complicated process and novice investors usually don't pick these investments themselves. Instead they invest in a fund, like a unit trust, that pools your money with other investors and spreads it out in different areas on the stock market. Some funds invest just in shares, sometimes focusing on specific sectors such as large UK or European companies. Some funds invest solely in property or fixed interest securities, and others may spread across all three types, or others. But the detail is left to a fund manager whose job it is to manage everyone's money.

Depending on this fund manager's choices and the state of the markets in general, the value of your investment can go up and down. But, as you would expect, the service is not free. The fund manager will charge a percentage of the market value of the fund every year.

If you find that you get the hang of the markets, you can even 'stock pick' yourself. But you'll have to do your homework first and make sure you fully understand the risks involved. For more information on financial investments for young people, look at Investments - next steps.