Bill Jamieson: The virtue '“ and necessity '“ of saving modestly

No matter how small the amount, Bill Jamieson urges everyone to get into the savings habit. Picture: Phil Wilkinson

A Bank of Scotland survey last week revealed that one in five Scots has no savings to fall back on. Two-fifths (38 per cent) have savings of less than £2,500 – just over a month’s wages for the average Scot. Of those who don’t have any savings for the long term, almost half (48 per cent) say they can’t afford to save.

As if that is not troubling enough, latest figures on household debt ring the loudest alarm bells. According to The Money Charity, the average total debt per household including mortgages is now £56,632, with an average debt per adult of £30,277 – about 114.5 per cent of average earnings.

Outstanding consumer credit lending was £197.4 billion, or £3,909 per adult. Total credit card debt in March stands at £67.6bn or £2,504 per household.

This means at the average credit card interest rate it would take 25 years and 11 months to repay if you made the minimum repayments each month.

How have we got ourselves into such a state? And how can we get out of it?

Derisory levels of savings and ballooning personal debt are the direct result of official policy. We have now had eight years of ultra-low interest rates – now down to 0.25 per cent, the lowest in the 315-year history of the Bank of England. The purpose was to encourage business and household spending to boost the economy.

When that is official policy, don’t be surprised at the results we now see.

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For millions of households, fixed interest saving has become a nil reward enterprise, with inflation working to wipe out whatever miserable gains may have accrued. Meanwhile, the cost of personal loans and credit card debt has tumbled – as household debt has become a lifeline for millions of households while earnings have stagnated and take home pay has fallen in real terms.

There is no easy way out of the financially defenceless state in which many – and especially young people – are now trapped. Not that saving was ever easy when young. But a start, no matter how puny, should be made.

I remember in my late twenties, having no savings at all, and in need of a mortgage top-up for a dry rot infestation that threatened the house where I had a flat. Back then, mortgage applicants had to show some evidence of regular saving. I opened a savings account with a branch of the Abbey National near my office.

Each week I made a point of paying in a minimum of £5 – pathetic even in those days. But at least the pass book soon had an impressive-looking record of entries. And the fact that I had made a start made me feel psychologically, if not financially, better off. After almost a year I was able to present the pass book as evidence of financial prudence, notwithstanding the snort from the branch manager when he saw the amounts. But over the years through job changes and pay rises I kept paying in larger sums when I could afford it.

I also took out a regular monthly savings plan with a unit trust. Then the tiny dividend payments began to kick in.

And on investments that came later, I have retained a bias towards income. Christopher Gooding, chief investment officer of investment firm Tilney, points out that for long-term investors, current share valuations matter less than inflation and dividend yield. The total annual return of the MSCI UK index from 1969 was 10.37 per cent, with dividend yield contributing 3.51 per cent and inflation contributing 5.87 per cent. Change in valuation only contributes 0.92 per cent annually.

And dividends continue to be a critical contributor to wealth accumulation. Last week, the latest Dividend Monitor from Capita Asset Services reported that shareholders in UK companies have been rewarded with a record level of dividend payments over the past three months.

Much of the increase has been down to sterling weakness as many stocks in the FTSE declare in US dollars. Even stripping out the currency boost, underlying dividends rose by 7.8 per cent compared to the same three months in 2016, thanks to increased payouts from mining stocks, consumer goods companies and even financials.

Here again, there are many low threshold regular monthly equity savings plans available from unit and investment trusts. These are certainly for the long term, and best to start with a low monthly amount that can be sustained over time. Building savings is a long lifetime haul.

But however feeble it may seem at first, and no matter how small the initial monthly amount, it begins a virtuous habit.

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