Three easy steps to a richer future

Want to get richer? It's easier than you think...

Fuelled by fear, and empowered by the wall of money that hit the economy as interest rates slumped to 0.5%, Britons have been saving in record numbers.

In fact, according to the latest savings survey from government-backed savings agency National Savings and Investments (NS&I), Britons are setting aside £92.41 each month, up from £90.12 in winter 2008/09. Those who save regularly are putting away the largest amounts since its survey began four and a half years ago -- an impressive £209.23 a month.

In other words, many of us are cutting back on unnecessary spending, and putting saving first.

Younger savers see the light

Perhaps predictably, savers in the 55-64 age brackets have continued to live modestly and put money aside for a rainy day. In contrast, 35-44 year olds seems to be having a tougher time of things, hit by higher outgoings.

Yet intriguingly, younger savers -- those in the 25-34 age group -- are saving 'encouraging amounts' according to NS&I. Especially during the darker days of the credit crunch, this age group experienced an increase across all savings indices, as well as the highest ever figures for the average saved per head (£117.63); and the amount saved by regular savers (£222.21) across the age group.

But although they're being savvy enough to put money aside in one of the steepest downturns in decades, are they squirreling it away in the right places?

Here are three savings products that any 25-34 year old should seriously be considering -- especially now, when interest rates are low, and stock market indices well down from previous highs.

The strategy: first, build a safety net of cash; second, invest in a low-cost index tracker offering the prospect of decent returns as markets pick up; and third, start a pension to provide for a comfortable retirement.

1) A cash safety net

Most people put far too little aside to deal with life's awkward moments, and have to borrow -- often on an expensive credit card -- when hit by unexpected expenses.

So the first priority is to stick cash into a savings account that pays a return, but where you can get your hands on the money quickly if you need to. For this reason, I keep £3,000 in a couple of instant access savings accounts. The interest isn't great at the moment, but I can get my hands on the cash quickly if I need to.

How much to put aside? Well, I like to have enough to fund two or three major expenses all at once -- figuring that if I need more, I'll cash-in some other investments, which in the meantime are locked away earning a better rate of return than in an instant access account.

2) Index tracker

Give or take a few months, the humble index tracker has been a feature of the UK savings market for ten years now. And although many millions of people do stash money away in them, many more don't. And I'm willing to bet that those who don't will turn out to include a goodly proportion of 25-34 year olds.

There's no particular mystique to an index tracker. Simply think of them as large investment funds that aim to match the performance of a given stock market index -- hence the name 'tracker'.

So if, for example, the FTSE All-Share index -- containing the shares of the largest 700 or so companies on the London stock market -- goes up 10% over a year, your savings will go up 10%, too.

But not quite 10%. There's a charge, levied by the tracker manager -- which is why low-cost trackers are the way to go. Virgin, one of the first entrants into the tracker market, charged 1% from the outset, and still does -- a charge that is quite high in today's terms.

Others are more reasonable. Legal & General's flagship UK Index FTSE All-Share tracker, for instance, has annual charges of just 0.52%. Others beat even that.

So in simple terms, if the index rises by 10%, and there's a 0.5% charge, you'll make a return of 9.5% -- well above what bank and building society accounts are paying. Best of all, you can put your index tracker in an ISA, just as you can with cash savings -- meaning that those gains are tax-free.

3) Start a low-cost SIPP

Chances are, you've at least heard of SIPPs -- Self-Invested Personal Pensions. But the odds are equally good that you don't actually have one. And there are even better odds on our 25-34 year old age group not having a SIPP, either.

In which case, they're missing out. Low-cost SIPPs are quite simply a superb savings opportunity.

Now, I'm not going to go all doom-laden at this point, talk of 'pensions time bombs', and churn out masses of statistics that show we're all headed for a penurious old age. Instead, I'm going to simply mention two key benefits to savers: tax-free returns, and free money.

Yes, that's right: free money. Plonk your savings in a SIPP, and they will automatically benefit from a 'top up' by the government, through basic rate tax relief.

Pay £800 into a SIPP, for example, and the government will automatically add a further £200, taking your total investment to £1,000. Higher-rate tax payers will benefit even more, with a further £200 in tax relief, although they will see this extra cash in a reduced tax liability, not their tracker. The upshot, though, is the same: a sum of £1,000 put aside for retirement, at a cost of just £600. Where it will grow, free of tax.

Our 25-34 year old savers won't be able to get at it until retirement, of course, which is why cash safety nets and index trackers come first. But a SIPP should definitely play a part in these savers' plans. SIPPS come in a variety of low-cost offerings. To find out more, read Five top low cost SIPPs.

Good luck!

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