Once you’ve built up a decent cash buffer, you may be wondering how you should invest your money for the future.
Investing your money means you can grow your wealth over the long-term, but you’ve got to make your money work for you. There’s no point leaving your cash in an account offering below-inflation interest rates. Here at Money Magpie, we believe that you should take that extra cash and invest!
While this may seem like a scary prospect, we’ve written a beginner’s guide to get you started and to help you invest your money so it works for you and your future.
- What does REAL investing mean?
- The basic principles of investing
- Step-by-step principles of investing
There’s no shortcut to investing well, you’ve got to be patient and wait for your money to grow. You’ll need to give your investments time to grow and park your impatience at the door. And, the longer your investments sit there, they more they grow.
Investing is about to get even better too, because you don’t need thousands of pounds to become an investor. This is a common misconception, which we’ve just busted. Everyone can invest with vehicles like equities ISAs. Even if you can only spare £10-a-month, your investment will build up into a tidy money pot over time.
Here are some other things to consider before you start investing:
- Have a long-term goal. This could be anything from a pension target, providing cash for your children or or something else in the future
- Diversify your investments to mitigate some risk
- Research the best strategy for your circumstances
- Work out your ‘risk appetite’. This is simply understanding how much risk you’re willing to take (bigger risks often equal bigger rewards)
Investing is an excellent idea, but lots of people get it all wrong. Many people don’t understand the basic principles of investing and they think it’s complicated.
It’s really not.
If you don’t know the basics you can be prey to dodgy companies that want to sell investment products that make them lots of money but keep us poor.
Honestly, investing isn’t hard. You can make plenty of money for yourself with just a bit of basic information. Follow these principles and you’ll know how to invest your money properly for your future:
Think about the long-term
Thinking about the long-term is when you’ve had time to ponder where you’d like to be in five years. So, set some goals for yourself, These can be short term goals, medium term (5-15 years) and long-term ones (15 years or more).
Spread your investments
Of course it’s much easier to spread your investments, when you have more cash. If this isn’t you, the first thing you should do is put your money into one kind of investment vehicle like a company pension.
As your income and savings increase, put small bits of savings into different investment products. For example, shares, cash and property will help to diversity your portfolio. This way, if one or two of them goes belly-up, you’ll still have the others to fall back on.
Never invest in anything you don’t understand
This should be obvious, but often people buy into a person and not a product. You may thin ketch adviser is smart and that the product is bound to grow, but if you don’t understand how it makes cash, there’s a good chance you won’t see any money.
Never invest in anything advertised on TV
TV advertising is very expensive and companies who can afford it are clearly making too much money out of their clients – you – to pay for it.
Be wary of investments advertised in newspapers, magazines and billboards. This is cheaper advertising but it still costs. Most of the best, simplest and cheapest investments are hardly advertised at all because they don’t make that much money for the financial companies. For example, tracker funds never get advertised. Makes you think huh?
Don’t ignore the downsides to any investment
When investing in shares or other products like bonds, you need to understand that one of the biggest factors that determines performances is the charges/costs.
- For example, with equity funds (where you pool your money with other people to buy shares), the management fee is taken out of your money each year before the rest is invested. It is usually much higher than the cost of an Index-tracking fund. This cuts down on the amount you can make in that year.
- It’s the same with property – if you have to pay out thousands per year to keep it going that will reduce the profit you make from it overall.
NEVER invest in something just because everyone else is
When everyone else is investing in something that is precisely the time that you’ll want to stay away from it. Top investors like Warren Buffett ignore popular opinion and invest only in what they personally believe to be sound ideas. That’s how they get rich!
Compound interest is your best friend when you’re investing
According to Einstein, compound interest is The Eighth Wonder of the World. This is because it does incredible things to grow your money over time.
Check out our very own article about compound interest here.
If it sounds too good to be true, it probably is. Really
if you’re serious about getting some basic investing information, then you need to get Jasmine’s book, Beat the Banks.
Remember! Don’t let your greed or fear overtake the basics of investing.
Now that you’ve got your head around the basics, you may be wondering how you actually invest your money. Well, don’t worry, we’ve got you covered with these six easy steps
Step 1: get out of debt
Let’s get things clear, there’s no point trying to invest if you’re in debt. Use your spare cash to pay off credit cards and loans as fast as possible.
Pay off your debts with the highest interest rate first. This ‘snowballing’ reduces your long-term interest payments. Keep paying off all your debts, but prioritise the maximum payment to the one with the highest interest rate, to pay it off fastest.
You my even need to consider other ways to get out of debt like taking up a side job or selling your assets. We’ve got a ton of helpful information and ideas in our Make Money guides.
Step 2: create a ‘savings safety net’
This is really important. All the big investors say that before you even think of investing for the long-term you should set aside enough money in a savings account to cover your outgoings (mortgage, utility bills, insurances, basic food and travel) for three to six months.
- For example, if all your outgoings cost a £1000 per month, then you’ll need a savings account between £3000-6000 in it as your ‘self-insurance’.
Figures from Shelter have revealed that one in three working families in England wouldn’t be able to pay their rent and bills for more than one month if they lost their job tomorrow. A savings safety net is the difference between financial survival and bankruptcy.
Because investing comes with risks, you need an emergency fund tucked away for those rainy days.
Step 3: make sure you have some money in a tax-saving pension
Most employees qualify for a workplace pension. While it can hurt to see your contributions taken off your pay cheque each month, it’s worth it. Your employer has to make contributions, too, and then the Government adds an amount as well – making it FREE MONEY for your retirement.
The money is taken off your pre-tax pay, too. When you’re 55 or older and choose to take your pension, you can take 25% of the total pot tax-free – meaning you won’t have paid tax on the cash either before it was paid in, or when you withdraw it.
Your retirement is a Big Deal, even if you’re only in your early 20s. Who knows what the future holds? The only guarantee is you’ll get older and eventually stop working, so you’ll need an income strategy. The earlier you can invest in your pension, the more time there is for your pension pot to grow.
The great thing about pension investments, other than the free money from the Government, is that you can’t touch it until you’re aged 55 or over. That means that, even if your other investments go south, your retirement fund is protected.
Step 4: invest in an easy, cheap stock market fund in an isa
The easiest way to invest in the stock market (and remember, this is a long-term investment) is through an index-tracking fund. While they’re simple, cheap and effective, they’re also well managed.
Make sure you use up your ISA allowance each tax year (6 April to 5 April). You can put up to £20,000 in an ISA-wrapped stocks and shares investment. Put as much as you can in that so that you don’t have to pay tax on what you make.
Index-tracking funds come pre-wrapped if you want, so just ask them for a fund ‘pre-wrapped in an ISA’.
Step 5: invest in at least one other ‘asset class’
Ideally, you should put money into three or more different investment ‘asset classes’. These can be anything from shares, pension, property, cash or bonds. You should keep putting money into the pension and stock market products each month/year, but it’s useful to spread your money about into different products too.
Keep some ‘liquid’ cash available too. That means you should keep a certain amount in an easy-access savings account just in case a really good investment at a good price comes up. It’s good to be in a position where you can invest in something quickly.
Step 6: leave it
You don’t need to keep messing about with your investments once you’ve put the money in. It’s a good idea to keep an eye on them once a year or so but make sure you’re not panicked into selling your shares just because the stock market has dived a bit…or a lot.
Remember! That’s what the stock market does.
In fact, seasoned investors wait for the stock market to tank before they go in and buy up lots of shares. In what’s known as a ‘bear run’, the stock market quickly rockets after a crash precisely because investors grab the opportunity to buy lots of shares at their lowest price.
For most people, though, the best thing is simply to invest regularly – ideally through a standing order every month – and keep on doing it for years. Over time, your investments will generally grow.
Get the inside track on how to invest money with these FREE investment guides – and then check out these top articles for more information on how to invest money into your future:
- Top 10 Ways to Grow Your Money
- How to Choose High Dividend Shares
- How to Buy Shares
- Stocks and Shares ISAs Explained
- Self-Select ISAs
- How to Invest in REITs
- Exchange-Traded Funds Explained
- How to Invest in Index-Tracker Funds
- How to Invest in Gilts
- Investing in Gold
- Save Money with Fund Supermarkets
- Investing in Royalties
*This is not financial or investment advice. Remember to do your own research and speak to a professional advisor before parting with any money.