Should I invest my money in an ISA or Government bonds? (Or any other suggestion)

Question

I am a UK citizen who works in the IT industry, I have recently turned 21 and I live at home with my parents and have no real commitments or bills.

I have saved up quite a sizable amount of money in the (almost) three years which I have been working full-time (£13500). I know it isn't a huge amount but for me it is. It has been steadily building in my current account which I've held since a child and has received literally no interest, ever. As I'm getting a little older and more mature in terms of what I want to do with my money I am looking for a safe way to make my money do some work for me.

I know this a relatively vague question but any tips, advice and or links to some good articles would be greatly appreciated.

Just to give some more detailed information for you to work with; my monthly salary after tax is just under £2000 and I spend just over £600 p/m on bills and expenses.

Should I stick it all in a cash ISA or maybe put it all in to premium bonds?

EDIT: My goals are to eventually become an IT contractor in my specific field (in the next 2-5 years), put down a sizable deposit on my first house with (house prices where I live are cheap in comparison to the rest of the UK - £120-£200k for a 3/4 bed-room semi). I would also like to retire before I'm 68! I have no students loans or debts.

Answer 1

So you are off to a really good start. Congratulations on being debt free and having a nice income.

Being an IT contractor can be financially rewarding, but also have some risks to it much like investing. With your disposable income I would not shy away from investing in further training through sites like PluralSite or CodeSchool to improve weak skills. They are not terribly expensive for a person in your situation. If you were loaded down with debt and payments, the story would be different.

Having an emergency fund will help you be a good IT contractor as it adds stability to your life. I would keep £10K or so in a boring savings account. Think of it not as an investment, but as insurance against life's woes. Having such a fund allows you to go after a high paying job you might fail at, or invest with impunity.

I would encourage you to take an intermediary step: Moving out on your own. I would encourage renting before buying even if it is just a room in someone else's home. I would try to be out of the house in less than 3 months. Being on your own helps you mature in ways that can only be accomplished by being on your own. It will also reduce the culture shock of buying your own home or entering into an adult relationship.

I would put a minimum of £300/month in growth stock mutual funds. Keeping this around 15% of your income is a good metric. If available you may want to put this in tax favored retirement accounts. (Sorry but I am woefully ignorant of UK retirement savings). This becomes your retire at 60 fund. (Starting now, you can retire well before 68.) For now stick to an index fund, and once it gets to 25K, you may want to look to diversify.

For the rest of your disposable income I'd invest in something safe and secure. The amount of your disposable income will change, presumably, as you will have additional expenses for rent and food. This will become your buy a house fund. This is something that should be safe and secure. Something like a bond fund, money market, dividend producing stocks, or preferred stocks.

I am currently doing something like this and have 50% in a savings account, 25% in a "Blue chip index fund", and 25% in a preferred stock fund. This way you have some decent stability of principle while also having some ability to grow.

Once you have that built up to about 12K and you feel comfortable you can start shopping for a house. You may want to be at the high end of your area, so you should try and save at least 10%; or, you may want to be really weird and save the whole thing and buy your house for cash. If you are still single you may want to rent a room or two so your home can generate income.

Here in the US there can be other ways to generate income from your property. One example is a home that has a separate area (and room) to park a boat. A boat owner will pay some decent money to have a place to park their boat and there is very little impact to the owner. Be creative and perhaps find a way where a potential property could also produce income.

Good luck, check back in with progress and further questions!

Edit: After some reading, ISA seem like a really good deal.

Answer 2

There are a number of UK banks that offer what passes for reasonable interest on an amount of cash held in their current accounts. I would suggest that you look into these. In the UK the first £1000 of bank or building society interest is paid tax-free for basic rate taxpayers (£500 for higher rate tax-payers) so if your interest income is below these levels then there is no point in investing in a cash ISA as the interest rate is often lower.

At the moment Santander-123 bank account pays 1.5% on up to £20000 and Nationwide do 5% on up to £2500.

A good source if information on the latest deals is Martin Lewis' Moneysaving Expert Website

Answer 3

I recommend investing in precious metals like gold, considering the economic cycle we're in now. Government bonds are subject to possible default and government money historically tends to crumble in value, whereas gold and the metals tend to rise in value with the commodies. Stocks tend to do well, but right now most of them are a bit overvalued and they're very closely tied to overvalued currencies and unstable governments with lots of debt. I would stick to gold right now, if you're planning on investing for more than a month or so.