Money: Financial Planning - You need to know what you're investing for

Grandmothers have long warned us to "save for a rainy day". In reality, most people's savings and investment plans are not even that precise.

A good savings and investment strategy means matching the right savings methods to the right objectives. Some savings vehicles, such as personal pension plans, are designed with one specific goal in mind. Others are more versatile. The most popular use for an endowment policy is to repay an interest-only mortgage, but endowments can be used for any medium- to long-term financial plans, such as school fees.

Choosing between the hundreds of accounts, savings plans and stock market investments can be complicated and time-consuming. "It helps to start by doing a quick overview of what you have already," says Justin Modray at independent financial advisers Chase de Vere. "Then you can work out what you are going to do in the next few years, in the medium term, which is five years or more, and the longer term, which is probably up until retirement."

According to Mr Modray, the next step is to list any financial commitments or changes in circumstances that could affect either earnings or spending. Moving house, changing jobs, marriage and children are all factors to take into account.

n A savings account is nearly always the best option for short-term needs. Despite falling interest rates, returns from good accounts remain significantly ahead of inflation.

n Investing for five or 10 years should be long enough to weather most financial storms. The right mix of investments depends on the level of risk you can accept. In turn, this depends on what the money is being saved for and when it is needed. The stock market is not an ideal home for emergency money because there is always the chance the market will be down when the time comes to sell.

Investment in the markets should be restricted to money you can afford to put to one side. "We are talking about disposable income," says Jeremy Batstone, at NatWest Stockbrokers. "If you have liabilities you should settle those first."

Even within the stock markets there are different app-roaches, each with its own level of risk. Managed funds such as unit trusts can invest for growth, concentrating on companies where analysts expect the share price to rise, or for income, where the emphasis is on dividends. Investing in UK blue-chip companies is generally seen as a low-risk approach to the market, while putting money into emerging markets or new industries such as biotechnology carries more uncertainty.

Bonds, in effect loans to companies, are less risky than shares and they usually give a fixed rate of interest. There are several bond-based investment products on the market, which make investing in bonds as easy as taking out a PEP. Another recent development are guaranteed PEPs, such as b2 from Barclays Bank. Here, part of the saver's money is invested in the stock market and part is used to buy a guarantee.

Buying a flat to rent can give pre-tax returns of up to 15 per cent. Specialist buy-to-let mortgages are widely available, for example via a scheme operated by the Association of Residential Lettings Agents (Aarla).

Income from investments is subject to tax but there are ways to shelter returns in tax-efficient vehicles such as a personal equity plan (PEP) or the forthcoming individual savings account (ISA). However, tax should not be the main reason for choosing an investment.

n Contacts: Chase de Vere, 0800 985 9000; Halifax, via branch or www.halifax.co.uk; B2, 0800 328 7238 or www.b2.com; NatWest (share dealing information), 0345 224488; Arla Buy To Let hotline, 01923 896555.