Your money-making expert. Financial journalist, TV and radio personality.
Beginning a savings plan can be a daunting prospect especially considering the plethora of investment options available nowadays.
This guide, written by a Gen-Zer (just graduated this year), aims to help young investors get started. One thing to bear in mind as a young investor is that you don’t need to put in large sums of money, even a tenner a month will be sufficient at first – the key is to start early as we shall see why.
As a Gen-Z myself I understand the difficulty of getting started. I began investing 2 years ago trying to take advantage of the Covid-19 market crash. I went in headfirst to the first trading platform I could find and was not fully aware of all of the investing options available. Fortunately, I made a small profit but this was most certainly down to luck and not competence!
Having now devised a more forward-thinking savings plan, I’ve laid out some tips on how the young investor can get started.
Young investors have an abundance of time on their side, the most valuable financial asset. Often referred to as the 8th wonder of the world, returns from compound interest, and dividends reinvested, can work miracles in the space of a few decades.
Here’s how investing early can puts you at a huge advantage:
Let’s imagine person A began saving £5000 annually from the age of 22. Person B started at 32 with the same annual investments. The rate of return has been assumed to be 7 percent and both retire at 67. Source: Vanguard
That extra £50,000 put aside by the ‘early saver’ now has £500k more in their retirement fund – that’s a whopping 10-fold return on investment! The question is, how much should you put aside each year? Financial experts recommend around 12-15% of your salary in order to secure a retirement while some suggest even more. Since you’re just starting out those figures probably seem laughable. However, bear in mind that those are just guides and at the moment. Whatever you can afford to invest will be better than nothing.
Before investing it’s worth considering reserving some funds – around 6 month’s worth of living expenses – as insurance for any unexpected events, such as a job loss. One place to stash reserve funds may be in a normal savings account, or a cash ISA.
An ISA, or individual savings account, is a type of savings account that allows you to earn interest, or capital gains, tax-free up to your annual allowance. There are four types of ISAs offered, and for the current 2022/23 tax year, the maximum you can put into an ISA is £20,000 per year. You can put this amount in multiple ISAs if you wish, as long as you don’t exceed the total yearly allowance.
A lifetime ISA (LISA) can be opened by anyone between 18 and 40. You can save a maximum of £4000 per year with the government adding a 25% cash bonus on top of that, up to £1000. The bonus is paid every tax year that you save something in your LISA until you reach 50, after which you can continue to earn interest but further payments are not possible. You can claim your cash bonus to contribute towards buying your first home or once you hit 60. If you decide to use LISA to help buy your first home, you can keep the account and continue saving for retirement.
A stocks and shares ISA allows you to invest without the burden of capital gains tax, so more money stays in your pocket. The returns will vary considerably on the provider and risk level you choose. To get an idea, the 21/22 tax year average was 6.92%.
Cash ISAs rates are often poor in comparison to normal savings accounts. However, they can still service a purpose, especially if you exceed your personal savings allowance.
The final option is an innovative finance ISA. This is an ISA that lends your money to borrowers in exchange for a set amount of interest. Generally speaking, peer-to-peer lending should be considered a relatively high-risk investment.
Some of the highest ‘target returns’ advertise up to 10% interest though most are much lower than this. Target rates of 5 and 6% however, are not uncommon. The key phrase is ‘target returns’. While a provider might aim to achieve this level of interest, it is by no means guaranteed. As a rule of thumb, the higher the target returns the more your capital is at risk. The ease of access you have to your funds will vary by provider – usually you’ll be able to withdraw your funds so long as they’re not currently being used though there’s sometimes a waiting period of 30-90 days.
Personally, I find investing your money can be an exciting prospect, especially the dream of a day trading lifestyle. I’ll warn you now however, that the majority of those who invest in this manner end up losing their money. According to the stock platform Etoro a whopping 80% of day traders lose money with a median annual loss of -36.6%. Unless you know what you are doing it is not advised.
As a young investor your investments should be focused on growth orientated assets given the years you have ahead of you for compound interest to really take its toll.
Index funds are a fantastic long term investment. An index fund is essentially a basket of stocks and shares, they usually don’t change much resulting in lower trading costs. Some of the most popular include the S&P 500 and FTSE 100 both of which are composed of the largest companies on the US and UK stock exchanges. They offer a simple approach to diversification, mitigating much of the risks associated with investing in a single stock.
It might seem like a long way away but honestly, the earlier you start to invest for your future, the less you have to put in (because of the time your investments have to grow) and the more you will have later on.
Here are a few possibilities to consider:
A SIPP is a pension ‘wrapper’ that allows you to save and invest a pool of money for your retirement. It is not dissimilar to a standard personal pension. The main difference with a SIPP is the greater choice with investments. You will get a tax rebate based on the income tax you pay.
If you’re currently in full time employment and earn more than £10,000 you may qualify for a workplace pension. Your employer must enrol you if you’re eligible. A certain percentage of your income must be paid into your pension as a legal minimum – with both you and your employer paying into it.
You can opt out of a workplace scheme but it’s a good idea to pay into it if you can afford to do so. That’s because you’ll get tax relief and extra cash from your employer. Here’s a useful calculator to help you understand how much you and your employer will be contributing.