Some of the greatest moments in your life can, unfortunately, be the most expensive. Did you know, for example, that the average wedding costs £14,000, the cost of a child over its lifetime is estimated to be £90,000 and the average graduate has run up a debt of £5,286 by the time they leave university? Such momentous costs could turn a happy occasion into a financial nightmare, but if you plan in advance you can achieve peace of mind and financial security.

Low-risk options

Naturally, how you save for important occasions depends partly on your attitude to risk, but whether you’re saving for a wedding or for children, the earlier you start the better. If you are totally risk averse, the only investment to offer you absolute peace of mind is a savings account. Mini cash ISAs currently offer the best returns for risk-free and tax-free saving - the highest rate currently available comes from Internet bank Smile (7.25 per cent).

If you don’t want to be rate chasing with ISAs - many with high interest rates now will reduce them later - you could go for a fixed-rate product. Julian Hodge Bank is currently offering a fixed rate of 6.4 per cent for between three and five years. Asset managers Hargreaves Lansdown’s Mark Dampier says: ‘How you decide to save is more to do with the time frame than about risk profile. Anything less than five years and you are going to have to opt for cash on deposit’.

Long-term saving

If you are saving for children, one option is to take out a junior bond. Effectively, these are unit-linked endowments on which gains and payouts are tax-free. You can choose the length of time they run for so that they pay out at a specific point, such as your child’s eighteenth birthday. The disadvantage with these products is that charges can be high, and you can be penalised quite heavily if you withdraw in the early years. Growth is hindered by these charges, and the maximum you can invest per month is only £25. ‘If you take out bonds, remember that you’re really looking at a ten-year investment,’ says Dampier. ‘And as they are insurance-related products, charges are inevitably higher.’

If you want to start saving for important occasions well in advance, you are far more likely to achieve good returns by investing in the stockmarket than by putting regular amounts in a bank or building society. According to data analysts Lipper, if you’d invested £10,000 in a basket of UK shares (the FTSE All Share index) ten years ago, that investment would now be worth £39,120. The average high street savings account, on the other hand, would have yielded well under £14,200.

Although the stockmarket involves a higher degree of risk than keeping cash on deposit, regular investment over the long term tends to smooth out volatility. Caution is still required when deciding where to invest, with the length of time you have to invest being crucial to your choice. A high-risk approach such as investing in individual shares is unlikely to be a wise move considering the certainty of returns you will want to get for paying for a wedding, for example, or raising children.

Collective investments

A much better idea is to invest in collective investments such as unit trusts or investment trusts. ‘The beauty of unit trusts and investment trusts is that they are very flexible,’ says Dampier. ‘You can increase or decrease the amount you invest, you can invest a lump sum and you can withdraw money.’ He suggests that two broad-based funds to suit anybody are Foreign & Colonial and Alliance Trust investment trust savings plans. With the Foreign & Colonial fund, about 35 per cent is invested in the uk and charges are below 0.4 per cent, which is very cheap. ‘But don’t just get seduced by low charges. Look at diversification,’ warns Dampier.

If you are investing over a long period, say fifteen or twenty years, you can afford to take a fair amount of risk with your money for potentially better returns. It might be worth looking at high-risk areas such as emerging markets, healthcare or technology. But bear in mind that funds that have performed well over the last few years, such as Henderson Technology, might not necessarily do as well in the next five years or so.

Diversify to survive

‘Don’t put all your eggs in one basket,’ says Dampier. He also suggests you try to increase the amount you save by 10 per cent every year and, if you are investing in investment trusts, aim to invest for at least ten years. And whatever the occasion you are saving for, everybody should try to wrap investments in ISA to keep returns out of the hands of the taxman.

Unit and investment trusts: What’s best in the nest?

Returns are based on £1,000 invested from 28 January 1991

Top five investment trusts over 10 years

• Foreign & Colonial Enterprise - return is £11,970

• Jupiter Primadona Growth - return is £11,570

• Pantheon Int’l Participation - return is £9,573

• Thompson Clive - return is £9,206

• North Atlantic Smaller Companies - return is £8,832

Top five unit trusts over 10 years

• Aberdeen Technology - return is £19,960

• Henderson Global Technology - return is £15,547

• Abbey us Emerging Companies - return is £14,226

• Fidelity American Special Situations - return is £13,769

• Framlington Health - return is £13,556

Lisa Bachelor is senior editor at Moneywise magazine

AT, March 2001, page 31