If you want to grow your money, savings are not really enough. You may find its time for some investing considerations.
It’s tempting to have savings in cash. It is easy to arrange, it’s easy to get our money out, and thanks to the government’s Financial Services Compensation Scheme our money (up to £75,000) is safe, even if the company we are saving with isn’t.
The problem is that it is probably earning very little interest – while inflation means its actual value (or spending power) is constantly whittled away.
What exactly is an investment?
With savings, your money remains just money. With investments you buy something – or a share in something – with the intention or getting a profitable return, the profit you earn from your investments. Depending on where you put your money, those returns could be paid in a number of different ways:
- Interest (from fixed interest securities)
- Dividends (from shares)
- Rent (from properties)
- The difference between the price you pay and the price you sell for of any asset you invest in.
Investing could help you reach your long term financial goals. But it’s important to understand that when you invest, you are putting your money at risk. The greater the potential for growth, the greater that risk is.
If your prepared to accept the risk, you could be ready to become an investor. But its important to consider our seven key steps first
1. Set your financial goals
You may not have a particular reason for investing, but you should decide what you want your money to do. Are you just looking to grow your money, or you want a regular income? Is there a set amount that you want your money to grow by or a minimum income that you need?
2. Set your time frame
Once you know what your goals are, work out how long you have to achieve them. Want to retire at 55? Want to buy a second home in the next five years? This will give you an idea of the kind of rates of return that you’ll need from your investments and whether your goals are realistic.
If you have short-term goals (less than five years) you should stick to cash savings because, if your investments fall in value, you might not have time to recover your losses before you need the money. Medium (five to 10 years) and long-term goals (10 years or more) are appropriate for investment, but some investments become less appropriate the older you get. You have less time for your money to recover if it falls in value.
3. Understand your attitude to risk
Understanding the risks of investing is fundamental. You might have plenty of time, and plenty of cash to fall back on, but if you can’t sleep at night when the markets became volatile, high risk investment is probably isn’t for you.
4. How much can you invest?
Be realistic about how much you can afford to invest. Assess all of your liabilities, like debts, insurance premiums, pension contributions, savings and living costs, to see how much spare cash you have to invest. Focus on reducing debt to levels that are easy to manage or, ideally, pay off all debt before investing.
Some money should be kept in cash as ‘rainy day’ money for emergencies. It could be a good idea to have enough cash for six months, if your income was to suddenly cease. Investing works best when you can take a long term view, so it might be best to stay in cash if you think you might need the money in the next five years.
5. How should you invest?
The various assets owned by an investor are called a portfolio. When you start investing, it’s usually a good idea to spread your risk by spreading your portfolio across a number of different products and asset classes. That way, if one investment doesn’t work out as you hope, you’ve still got your others to fall back on. This is called ‘diversifying’. Some investment funds provide diversification for you by spreading investments across a range of assets, and letting you buy what is in effect a share of them all.
You can buy many types of investment directly. But for some investments, like shares, it may be easier to use a broker to buy them for you. Remember, funds and brokers will make charges which will eat into the returns your investment earn for you
6. Think about tax
Investments can attract tax, which reduce your effective returns – so it’s important to make full use of your various2016/17 tax allowances.
- Your personal capital gains allowance £11,100
- Your ISA allowance – You can invest up to £15,240 in an ISA each year
- Your dividend allowance – you can now earn up to £5,000 in dividends each year
- Your personal savings allowance – you can earn up to £1,000 each in savings interest
- Your annual pension contribution allowance is currently £40,000 a year, up to the lifetime allowance of £1 million.
7. Get financial advice
Many investors make their own decisions, without advice. But DIY requires time, knowledge and confidence. You’ll probably want a portfolio that is a mixture of bonds, equities and cash tailored to your investment needs, and which maximises tax efficiency, all of which demands expertise.
If you get professional financial advice, you’ll be able to talk through all the points raised above and ensure that your investments are tailored exactly to your needs.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.
THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.
PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.