How Should a Beginner Invest In Savings?
In a nutshell, investing is purchasing something that you believe you will be able to sell at a higher price in the future. Investing isn’t stashing your cash in a savings account despite what many will have you believe. While saving may effectively safeguard money for instant-access cash for emergencies, it will simultaneously restrict your potential financial expansion.
There’s no possibility of you growing your money beyond the small annual return that your bank will pay in interest rates when your money is locked away in a savings account. For beginners with limited knowledge and experience in investing and/or saving, this article will guide you through the basics to get you started.
How To Begin Investing?
Before you invest anything, buy shares or funds, it’s a sensible idea to wipe the slate clean so that nothing can derail you or halt your progress at a later stage. You can accomplish this by:
- Paying off any expensive debt with high interest rates such as a credit card or overdraft. Otherwise the interest payments would offset any investment gains.
- Make sure you have a back-up fund of between three and six months’ earnings. This is money for emergencies like your car breaking or oven faulting.
Should You Save or invest?
When investing you take a chance that the markets will go in your favour knowing they can fluctuate constantly up and down. Savers will eventually get caught by inflation which will devalue their lump sum. If you are still concerned about investing, it is important to remember that nothing is risk free when it comes to your money. The rising cost of living means your money won’t go as far in the future as it could with a sound investment opportunity.
The majority of banks offer extremely low rates of interest on savings accounts. They are regularly well below the rate of inflation which creates a predicament no saver wants to be stymied by. While keeping your money in cash may feel like the safest option, you’ll be losing money in real terms and potentially compromising your future through indecisive action or the wrong move altogether.
Crucial Things To Ponder…
It is vital to understand exactly what is motivating you to invest. Ask yourself some key questions and face some essential truths before you begin any investment journey for the wrong reasons:
- How much of my investment can I stand to lose?
- Am I strong enough to avoid selling if my investments drop?
- What is the length of time I am content to leave my money tied up for?
- Am I comfortable tying my money up in investments for at least five years?
- How much capital can I afford to invest?
- What are my specific long-term investment goals?
Selecting An Appropriate Platform
The easiest and cheapest way to invest is through an investment platform, regardless whether you are a novice or an experienced investor. Similar to when you purchase casual clothes or accessories, there are “shops” for buying and selling shares and funds often known as “fund supermarkets.” The majority of these (and certainly the reliable ones) will contain useful websites and apps to help walk you through the investment process. For any new investors for whom this is their first experience, brace yourselves because you need to become accustomed to extra fees. You will typically be charged three types of fee:
- One for using the platform (seperate from the management fee)
- Another when you buy or sell your investment
- If you purchase a fund, you will also have to pay a management fee
Use a Wrapper (Tax-Free)
There are also government-approved tax-free wrappers available for you to take advantage of. Many users say that they are an ideal place for your investments, due to the security and benefits associated with them. These include:
- ISAs (specifically a stocks and shares ISA)
- Both of these products protect your investment profits from capital gains tax and dividend tax.
What can I invest in?
Common types of investments may include but are not limited to the further options discussed in detail below. Always limit your investment to something you truly understand or at least have received trusted guidance on. If you decide to buy shares in a business, make sure it’s a firm that you know about, or even use yourself. Financial products can be classed in this way too.
A share is a tiny fragment of a company. When you buy a share, you own a piece of that company. If the company does badly you lose money. When it does well, so do you. You earn money when your investment return comes in the form of the value of your shares rising. The value of your shares go up if the company does well. Alternatively, you get rewarded for investing by receiving a portion of the profits that these companies make, known as dividends.
Investing in shares: The advantages
- The ability to choose the specific company you want to buy stocks for, from Coca-Cola to Reebok.
- Substantial rewards if the company is successful via share price increases and dividend payments.
- You get to weigh in on decisions regarding the future strategy and growth of the business.
Investing in shares: The disadvantages
- Purchasing stocks with a firm that ends up performing badly means you risk losing your money.
This is the means of lending money to a company or country. You get paid a set amount at the end of the agreed period, usually after the bond “matures.” In addition, you receive regular interest payments commonly referred to as coupons.
Investing in bonds: The advantages
- Bonds are generally considered lower-risk than shares by the majority of experts.
Investing in bonds: The disadvantages
- Your investment returns are likely to be smaller than shares as a result of the perceived lower risk involved.
Rather than choosing your own individual shares, you can put your money into a mutual fund. This is essentially a group of shares, controlled by expert managers who then invest the money in an array of other investment choices. If buying a share is like picking the MVP of a basketball team, a fund is equivalent to backing the entire roster. If one player doesn’t do well, there are others who can compensate for this. You generally have a straight choice between passive funds that track a stock market or active funds, where a professional investor picks stocks on your behalf.
Investing in funds: The advantages
- To decide which shares and range of assets to buy and sell, a fund manager utilizes their experience and expertise.
- Funds are often less risky than individual shares because they include many types of investment.
Investing in funds: The disadvantages
- A fee is charged by all fund managers.
- Despite having a range of assets to balance risk, the overall value can still drop.
How much capital is it wise for a beginner to invest?
It all depends on your financial goals and situation. It’s always a good idea to have an emergency fund of at least three months’ earnings in a savings account before you invest.
You should be prepared to leave your money tied up into your investment for at least five years to give it enough time to grow. Some investment platforms now let you invest with just a few pounds. So you might want to start with small amounts first to try out the features before trickling in more of your savings as time goes on.
Is it best to Use a lump sum or regular savings?
Investing a lump sum will get your money working for you immediately and compound any returns from the start. However, if the market dips, the whole sum will be exposed to the fall.
If you drip-feed a fixed amount over time, it can smooth out the highs and lows of the market. In other words, it will buy fewer shares when prices are high and more when they are low.
The drawback is that you can miss out on the full benefit of rises in the markets in the early years as you will have a much smaller sum of money invested to begin with.