We’re always told to save our money – but this could actually lose you wealth and buying power over time. Investing, on the other hand, can grow your wealth over the long-term.
When you’ve got a decent emergency cash buffer saved – which everyone needs – what do you do with the rest of your savings? Leaving them in an account offering below-inflation interest rates (which happens a lot) isn’t going to make your money work for you.
Instead, take your extra cash savings and invest! It might seem like a scary prospect, especially when all the adverts say “may lose your investment” or that you’ll “not get back what you put in” and that “your money is at risk”.
Well, yes, all of those things ARE true. However, investing over the long-term – at least five years – rides out the bumps in the road. You’re still more likely to make money over decades than lose it – if you know how to invest well.
This is the total beginner’s guide to investing. Let’s get started!
Waiting patiently for your money to grow.
That’s the crux of it!
You don’t have to be rich to invest, either. A common misconception is that you need thousands of pounds to become an investor. In fact, using investment vehicles like equities ISAs, even a £10-a-month investment builds up into a tidy money pot over time.
Investing also means:
- Having a long-term goal, such as your pension, providing for your children, or something else in the future
- Diversifying your investments to mitigate some risk
- Researching the best strategy for your circumstances
- Choosing your ‘risk appetite’: how much risk you’re willing to take (bigger risks equal bigger potential rewards)
Investing is an excellent idea, but lots of people get it all wrong. Many are ignorant of the basic principles of investing and they think it’s complicated. It’s really not. However, 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.
Step 1 – get out of debt
There’s no point trying to invest if you have money you owe on credit cards and loans. Use any spare cash you have to pay that off as fast as possible.
Start with paying off the debts with the highest interest rates first. This ‘snowballing’ helps to reduce your long-term interest payments. Keep paying what you can on all of your debts – but prioritise the maximum payment to the one with the highest interest rate, to pay it off fastest.
Consider other ways to get out of debt. Take up a side job, perhaps, or sell 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, etc) for three to six months.
So, if it costs you £1,000 per month to keep the roof over your head and body and soul together you should have a savings account with between £3,000-6,000 in it as your ‘self-insurance’.
A recent report 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.
Setting up that savings safety net can make the difference between financial survival and bankruptcy.
Investing comes with some risk: you need to have your separate emergency fund tucked away – don’t use it to invest!
Step 3 – make sure you have some money in a tax-saving pension
The recent pension changes mean most employees qualify for a workplace pension. Unless you already pay into a private pension, try not to opt-out of this scheme. It can hurt to see your contributions taken off your pay cheque each month – but 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 right now. Who knows what the future holds? The only guarantee is you’ll get older and eventually stop working – so you need to set up an income strategy for when the time comes. The earlier you can invest in your pension, the more time there is for your pension pot to grow.
If you don’t have a company pension, don’t panic. You can create your own using a Self-Invested Personal Pension (SIPP) or take a Stakeholder Pension plan.
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. They’re simple, cheap and effective. They also tend to do better than most managed funds (those run by over-paid City boys).
Make sure you use up your ISA allowance each tax year (April 6th to April 5th). From the 6th of April 2017 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’ (e.g. shares, pension, property, cash, 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. 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.
Honestly, investing is not hard. You can make more money for yourself than the City boys if you just get a bit of basic information and don’t let fear or greed take over your thinking. Follow these principles and you will be able to invest properly for your future:
This is easier when you’ve had a think about where you would like to be in five years and beyond. Set some goals for yourself – short-term, medium term (5-15 years ahead) and long-term (15 years or more).
Spread your investments.
This is easier when you have more money to spread, of course. First, put your money in one kind of investment vehicle (like a company pension). Then as your income and savings increase, try put small bits of savings in different investment products (for example some in shares, some in cash, some in property and so on). This is known as diversifying your portfolio or ‘asset allocation’.
This way, if one or two of them goes belly-up, you will still have the others to fall back on.
Never invest in anything you don’t understand.
Even if that nice, smart adviser tells you the product is bound to grow and give you security later on, if you don’t understand how it makes money, there’s a good chance it won’t.
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 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?
Never ignore the downsides to any investment.
When investing in shares or other products like bonds, be aware that one of the biggest factors that determines the performance of your investment is the charges, or costs each year.
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 £1,000s 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.
In fact, when everyone else is investing in something (for example technology shares or property) that is precisely the time that you need to stay away from it. Top investors like Warren Buffet 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
Compound interest is The Eighth Wonder of the World (according to Einstein) because it does such incredible things to your money over time.
If it sounds too good to be true, it probably is. Really.
Finally, if you’re serious about getting some basic investing information, get my book, ‘Beat the Banks’.
With so many different ‘asset classes’ and ways to invest, even when you know you WANT to invest, it’s often confusing to know which one is right for you.
Get the inside track on how to invest with these FREE investment guides – and then check out these top articles for more information:
- 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