So, you’ve got into the saving habit by putting money aside for the deposit for your home. Now you’ve moved in and you’re used to paying your mortgage and your bills, it would be a shame to put that saving habit to waste!
Saving for your future can seem daunting. The investment market can be a minefield, with thousands of funds, shares, bonds and other investments to consider and endless terms which might put you off.
To help you, we’ve put together an essential beginner’s guide to investments. From working out what you’re saving for to where you plan to invest, you’ll find everything you need to know.
1. Before you start investing
You have some spare money and you’re thinking about starting to save or invest for your future. Before you begin, there are three other factors you should consider first.
Repay expensive debts
Before you start investing, it’s often wise to repay any debts you have first. Interest rates on credit cards and personal loans can be high, and it can often be difficult to generate returns which outweigh the interest you’re paying on your debts.
Consider using any surplus money you have to repay debts, starting with those that charge the highest interest rates.
Make sure you have an emergency fund
Saving and investing is typically a medium to long-term proposition. That means that money you invest should typically be held for at least five years as a minimum, and you shouldn’t expect to have to dip into your savings in an emergency.
So, before you start investing, make sure that you have a rainy-day fund available. This should be in an easy-access account and be there if you need to fix your car, repair something in your home, or travel to be with an ill relative.
Advisers typically suggest putting aside somewhere between three- and six-months’ earnings in an easy-access account.
Ensure you’re protected
You may have also arranged appropriate protection when you took out your mortgage. If not, it’s important to ensure that you have the right cover in place in case you are in an accident, lose your job or are too ill to work.
Making sure you have the right insurance in place will protect you and your family should the worst happen. It also means that you might not have to dip into your savings.
2. Why are you saving?
Before you start putting money aside, it’s worth taking some time to work out why you want to invest. Do you want to provide yourself with a comfortable retirement? Is there something specific you’re saving for (for example, a car or holiday)?
Establishing why you want to save can have an impact on your investment choices. For example:
- If you’re saving up for a holiday that you’re going on in six months’ time, stocks and shares are unlikely to be suitable. You’ll probably need a cash savings account where you can access the money easily.
- If you’re saving for your retirement, then a pension may be the best option. Pensions are a tax-efficient way of funding your income in retirement, but you typically won’t be able to withdraw any of your investment until you retire.
- If you’re saving for the medium-term, then you might want to consider investments such as stocks and shares in order to try and generate a better return than leaving your money in low interest rate savings accounts.
Working out what your goals are, and how long you want to invest for, are crucial to deciding what the best types of investment are likely to be.
3. What’s your attitude to risk?
When you’ve established what your savings and investment goals are, you then need to consider your attitude to risk. Simply put, how much risk are you prepared to take to improve your chance of a good return?
Taking very little risk might ensure you don’t lose money, although your returns could be moderate. Taking more risk can lead to volatility, but you may make a better return in the medium or long term.
With so many investment choices available, working out your attitude to risk will help you to find a share, fund or investment that fits your profile.
One common way of managing risk is ‘diversification’. This involves spreading your cash across different types of sectors and investments. For example, some funds combine UK shares, overseas equities, bonds and property in order to provide diversity. The idea is that if one sector is performing badly, it may not affect your entire investment as other sectors can balance out your returns.
Diversification is a good way of spreading risk in your portfolio.
4. Decide where to invest
With thousands of shares, funds, ISAs, pensions and other investments available, deciding where to put your money can be tricky.
Many online services provide loads of data and information to help you to decide.
Your other alternative is to speak to a professional adviser or planner. These qualified individuals can look at your finances holistically, from ensuring you have the best mortgage deal and the right protection, to providing advice on the most appropriate investments for you.
Our adviser will talk to you about your goals, your attitude to risk, what investments are available, and fees and charges. And, they will continue to work with you over the long term to ensure your arrangements remain suitable as and when your circumstances change.
5. Review regularly
Whilst you shouldn’t check share prices every day, it is important to regularly review your investments. Lots can change which mean that you may need to make tweaks to meet your new goals.
Tinkering with your investments too often is a mistake many first-time investors make. It’s important to remember that investing is for the long term, and the best returns are typically made by choosing a strategy and sticking to it, even if the values of your investments fluctuate along the way.
If you want professional, independent investment advice then get in touch. Email firstname.lastname@example.org or call (0207) 808 4120 to find out more.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.