Shell out and watch your nest eggs grow

EASTER is a time for eggs, but as well as the painted or chocolate variety, attention turns to financial nest eggs and the difficulty of acquiring one.

Given today's tight financial constraints, low returns from deposits and volatile stock and commodity prices, savers have rarely faced more obstacles when it comes to building a financial cushion.

Brewin Dolphin director Bryan Johnston says: "Life's tough at the moment. Many households, particularly in the 25 to 45 age bracket with young families, are seeing their income completely gobbled up, in some cases literally, by the rising cost of food."

Yet squeezed though they are, many households will be determined not to leave themselves so exposed again. The best way to protect your family against economic storms is to have a buffer of money to cushion you against nasty shocks.

Danny Cox, of Hargreaves Lansdown, explains: "It is a natural reaction during a financial crisis. Individuals batten down the hatches and try to protect themselves against future storms by getting some money behind them."

But where is the money to come from, would-be savers ask? It can't just be rustled up from thin air. Well, with a bit of work it can. Scotland on Sunday shows you how, by answering your questions and dealing with common myths and misunderstandings.

Q Where do I begin?

A The best way to build up a nest egg is through regular saving. Even 50 per month will grow into a worthwhile sum over the years. To free up this 50, write down everything you spend over a fortnight and see where savings can be made, such as taking sandwiches to work rather than using the canteen, going without impulse buys such as coffee or bottles of wine, and staying in for one extra night. Use these savings to get you started, and after time you will not notice the money disappearing.

Alternatively, if you have been fortunate enough to benefit from lower mortgage repayments thanks to low interest rates, you should be saving this money and not spending it.

Q What should I do with this money?

A This depends on what savings or debts you already have. If you have no other savings you should put the cash on deposit with a bank or building society.

But returns from deposits are currently disappointing. If you have other cash you can rely on in a short-term crisis then you could consider a unit trust or investment trust savings schemes.

Q Shouldn't I pay off my debts first?

A Absolutely. There is no better financial return than getting rid of your credit cards or paying off your mortgage early.

But try to look on this in a positive rather than negative light. Consider as you make these repayments that you are actually building up a nest egg for the future by releasing funds which would otherwise be spent on debt reduction.

Q What sort of deposit account should I open?

A Ideally, you want to minimise tax, so you should opt for a regular saver tax-free Isa. Unfortunately, these are thin on the ground. The Skipton has one which has no monthly minimum and a maximum of 445, and pays 3.25 per cent. The Manchester Building Society pays 4 per cent. The account is open to Scottish savers but must be opened by post.

Alternatively, savers can simply open a good Isa, and make their own monthly injections. But this will require sterling willpower. Santander's Flexible Isa is paying 3.3 per cent.

Q Will anything pay more?

A Over time, you may get a better return from a unit trust or investment trust savings scheme. Here you receive regular dividends, which if reinvested will help nest eggs to build faster.

Q Isn't it risky putting my money into the stock market?

A Yes, but actually less risky when it comes to regular savings, thanks to something called pound-cost averaging. This is because, by regularly injecting funds into the market, you dispense with one of the biggest market gambles, which is timing the market.

By buying regularly, you will frequently purchase when shares are low. This means that without even trying you will time the market to perfection, picking up more stock at the best price.

Q It is all so confusing. There are tracker funds, unit trusts, investment trusts. Where do I begin?

A Tracker funds, as the name suggests, track a particular index. These funds are cheap, but they will always slightly underperform the index they are tracking because the company running them will take a percentage in charges.

That said, most active managers underperform the index as well. These are often a good place to start, though. Although dull, you can be reasonably sure the investment will do what it says on the tin. The only problem is that when an index falls consistently your investment will fall with it.

The alternative is an actively managed fund. These can invest in a range of shares or indeed other assets. So a fund might include an exposure to cash, bonds and property as well as equities.

A good fund manager should offer a superior return, but he can only do as well as the markets he is operating in. Active fund management will normally cost more. However, you can find discounts by dealing through discount brokers or fund supermarket platforms.

Investment trusts are companies in themselves, which have issued a finite number of shares. They invest in other companies, and the investment trust shares go up and down in line with the value of the underlying assets and demand.

They are more complex than unit trusts, in that they can borrow to invest. But they have always offered a very cheap route into the stock market via their monthly saving schemes.

Oeics (open-ended investment companies) are a hybrid of the two. They are open-ended, like unit trusts. But when investing in unit trusts, you buy units at the offer price and sell at the lower bid price. The difference in the two prices is known as the spread. An Oeic fund has a single price, directly linked to the value of the fund's underlying investments.

Q What sort of funds should I consider?

A A recent report by Hargreaves Lansdown put smaller companies in the UK, Europe and America as the top performers over the past year. Smaller companies, however, can be more risky.

Its top-ten performers in alphabetical order were Aberdeen Emerging Markets, Artemis Income, Artemis Strategic Assets, Invesco Perpetual Distribution Fund, Invesco Perpetual High Income, JPMorgan Natural Resources, Lindsell Train Global Equity, Neptune Russia & Greater Russia, Schroder UK Alpha Plus and Standard Life UK Smaller Companies.