It's not just for rich city traders.
If you've been squirrelling away at savings over the last year or so, you may have noticed that the money you’ve banked hasn’t really grown as interest rates continue to remain low or at zero.
Not a big deal, you may think - but here’s the thing: unless your money is growing in line with the rate of inflation, which is the cost of goods and services, then the cash you have sitting in savings is actually losing value.
The current rate of inflation is 3.2% [correct September 2021], but finding a savings account that pays you that or anything above it is impossible in the current climate.
So, what can you do about it? The answer is investing. Investing can help your money grow, not only to beat inflation, but also to help you meet your life goals - whether that’s to get onto the property ladder, start a new business, or maybe even to retire early.
The good news is it’s easy to get started with investing and you don’t need to be a rich city trader to do it either. And better still, research shows that when women invest, they do it better than men.
Here’s a simple guide to investing for beginners:
Start investing small
Did you know you can actually start investing with just a pound? Yes, that’s right, about the same as the cost of a 50ml bottle of anti-bac. So, there’s no excuse for putting it off.
The sooner you start, the sooner your money will start to grow and you’ll benefit from what is known as compound interest.
Compound interest is interest on interest, which basically means when you earn interest, it is reinvested and you then earn interest on the original amount as well as the interest. When you’re investing, the growth with compound interest can be phenomenal.
The sooner you do it, the more your money will grow.
How do I start investing?
If you are saving into a pension, then guess what? You’re already investing, as your pension money is put to work in the stock market.
But if you want to grow your money with savings as well, then start by taking a look at what is known as ‘robo-advisers’.
The providers, also known as digital wealth managers, take you through a gamification process (by which we mean a whole load of fun questions) to assess your attitude to risk and assess your goals - it then uses this information to match you to a ready made investment portfolio. It really is as simple as that - all you have to do is start paying in a regular amount, or something as often as you like. The robo-advisor will take care of the money for you by putting it to work in the stock market.
Which are the best Robo advisors to use?
Some robo advisers to consider are:
- Wealthify - where you can start with £1
- Nutmeg - where you can start with £100
- Evestor - where you can start with £1
- Clim8 - for green investing. You can start with £25
- MoneyBox - where you can start with your loose change. The app will round up your spending to the nearest pound and shift it into investments for you. So, if you spend £5.10 on a bottle of wine, then it will put 90p into investment savings for you.
Pick your own funds
A fund is basically a basket of company shares put together by a fund manager. If you feel confident, you can choose your own funds to create your own portfolio. The benefit here is that you will have a lot more choice about where to invest.
A good place to start if with what is known as passive funds (also known as index or tracker funds). Sounds complicated, but they are just funds that follow a specific index, such as the FTSE 100 (the top 100 companies listed on the London Stock Exchange).
To get started, open an account with investment platforms such as Vanguard, AJBell, Fidelity or Hargreaves Lansdown for example. You can find information on the top tracker fund on the provider’s websites.
You can of course opt for other funds, such as green investing ones or a fund that invests in gold, for example. Just be sure to have a good mix, so that your money is spread across various investments and it reduces risk.
How quickly will my money grow if I invest it?
According to an investment calculator from Hargreaves Lansdown, if you put £20 a month into an investment account and saved for 10 years, the potential growth at 8% will leave you with £3,625. Your initial contribution is £2,400 - that’s a growth of £1,225.
Of course, if you don’t invest, then all you will have is what you put in (£2,400) with little or no growth.
Will I lose my money if I invest?
Investing does come with risk and you can lose all or some of your money. But generally, investment almost always delivers strong returns.
The key thing is to make sure you only invest money that you don’t need for at least five years. The longer you invest, the more time the money has to grow and outride any bumps in the stock market along the way. And of course, don’t forget inflation - money not invested is losing value unless it is keeping up with the cost of living.
“But there’s also ‘shortfall risk’, which is the potential that you won’t have enough saved to meet your needs or do the things you want, such as a deposit for a home for yourself or your children, travelling to a place you’ve always wanted to see, enough money saved for a comfortable retirement,” says Annabelle Williams, personal finance specialist at Nutmeg.
“There are people who wouldn’t go near stock markets and put all their money into property in the belief that it’s safer. What happens, though, when they need the money soon - but the investment property doesn’t attract any buyers for a year? By investing your money, you can address shortfall risk as your savings should hopefully increase in value,” she adds.
Use your ISA
When you open your investment account, tick the ISA box. An ISA (individual savings account) is basically a savings account but the money growing in there is tax free. You usually have to pay tax on any earnings from investments, but you can save up to £20,000 into an ISA and the tax man will keep his hands off your money and whatever it earns.
If you’re saving for your first home, then you can put £4,000 of this allowance into a Lifetime ISA, where for every £1,000 you put in, the government will pay you a generous 25% bonus. You must be aged between 18-40 and can save into one until you are 50. Find out more here.
Avoid investment scams
It’s important to remember that investing is not a get rich quick scheme, and any promises as such are likely to be a scam. Take a look at the Take Five to Stop Fraud site for advice on staying safe from scammers, and the FCA’s warning list for known scams.
Before you start investing
Finally, before you invest, make sure you have some money put away for a rainy day fund. This is cash you might need if there is an emergency - such as redundancy or getting too ill to work.
You should also look to pay off expensive debt, such as a credit or store card, first.