In 2006, best-selling author and iconic investor Robert G. Allen famously said, “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." Across the board, interest rates on savings accounts are dropping[1]. If you have the type of savings account where you can access your money at any time, the interest you receive might not even beat the rate of inflation1. If this gets you thinking about how you could be making more out of your money, investing could be a good option for you. Here are some top tips to help you get started.
Set your goals
What are you planning to do with your money? From bamboo rafting to bathing an elephant, we all have very different goals and aspirations. We want to help you turn your dreams into a reality, so it’s time to draw up that bucket list!
Figuring out your short-term (less than 5 years), medium term (between 5 and 10 years) and long-term goals is a top investing tip.
Set your time-frame
Short-term goals (less than 5 years)
For the short-term goals, you may want to keep your money in less risky places, such as in a savings account. There are some savings accounts which won’t let you take your money out early and offer slightly higher interest rates. If you don’t mind locking your money away until some time has passed, this could be a good option.
For example, imagine that you and five of your family members are planning a reunion in two years, which will cost around £5,000. You could each pay £35 a month into a savings account. This may be a more strategic approach than investing, which is better suited for medium and long-term goals.
Medium-term goals (between 5 and 10 years)
Looking to own a property within the next decade? Planning ahead for your child’s higher or further education?
These types of goals are generally medium-term, and often require more money than short-term dreams. At this point, investing could be a better option for you. This is because the investment market tends to do better than savings accounts for longer time-frames. For example, if you had invested in the FTSE 100 over the past 10 years (and reinvested your profits) your money could have grown by 8.3%[2].
To make the most of your annual tax allowances, which are like little gifts from the government, you could start with a Stocks and Shares ISA. When you hold a Stocks and Shares ISA you can invest up to £20,000 a year and you don’t need to pay UK tax on interest, dividends or capital gains earned. As a parent, if you’re looking to invest on behalf of your child until they are 18, you may also want to consider a Junior ISA. Your child benefits from tax relief, and with Wealthify, you can have the same hassle-free, low-cost service.
Long-term goals (more than 10 years)
If you’re planning on setting money aside for more than 10 years, a savings account is probably not the best option to preserve your money. You may have noticed how the prices for the same product have slowly increased over time. This is because of inflation, which means that goods and services become more expensive, and you cannot buy as much with the same amount of money as time goes on. Sadly the rate of inflation could eat away at the value of your cash savings over time. An investment such as a buy-to-let property or buying into the stock market may be a better option for storing your money.
Savings vs Investing
The rate of inflation that the Bank of England is aiming for is 2%[3] per year. With this rate, if you were to put £200 a month into a savings account for 25 years, with a (quite generous) interest rate of 2.5%, it would be worth £83,408[4].
If you were to instead put that monthly £200 into a medium-risk investment plan for the same time, you could expect to have £97,283[5]. This is a difference of £13,875, with no extra effort required from you. By simply putting automatic payments into an investment account, rather than a savings account, you could have more money to enjoy. Although, you could end up with less than initially invested.
Find the right investment plan for you
When banks offer mortgages or loans, they do not treat every individual or business in the same way. It depends on how much money they earn, how much they can afford to pay back and if the loan is justified. In the same way, as you begin your investment journey, you take on the role of the bank. You will have to decide whether you want to fund or lend money to different companies and governments.
Find the right risk level for you
Different kinds of investments have different characteristics. Some are more risky than others, meaning that you may get back less than you put in. However, there is a really solid economic rule in investing, it is known as the “Risk / Return Trade Off”. It is the finance equivalent of “you have to be in it, to win it” or “no pain, no gain”. The riskier the investment, the bigger the potential pay-off. This could make the extra risk-taking very rewarding, it is known in the industry as the “Risk Premia”. It’s a good rule to keep in the back of your mind as you consider your investment plan. Here at Wealthify, we offer five different risk levels: Cautious, Tentative, Confident, Ambitious and Adventurous. The more risk you are willing to take, such as with the Adventurous plan, the more return you could potentially receive. However equally, if you take a less risky approach, such as with the Cautious plan, you are less likely to lose money. Finding your level is very important, so that you feel comfortable and secure with your medium or long-term investment strategy.
Create a good mix of different investment types
It’s not all or nothing, and you can invest some money in very risky assets, and some money in less risky assets. You can also invest in different industries and with different investment types.
Spreading your money around investment types is a very prominent investment strategy, known in finance as “diversification”. As investment managers, we have a responsibility to do this for our clients, and we would really encourage you to think about diversifying your money if you want to start managing your investments yourself.
As well as figuring out how risky you would like to be with your investment choices, also consider whether you will need to access your money in the future. If you want the option of quick turn-around of money, some investments are easier to sell than others. How easy an investment is to sell is known as it’s “liquidity”. It could be a good idea to incorporate some cash in your plan as well to take advantage of good opportunities.
Think about what you are happy to invest in
When we talk about being comfortable with your investment choice, it’s not just about risk. You need to feel happy about how your money is influencing the world. More and more people are looking to avoid funding industries such as adult entertainment, weaponry, tobacco or gambling. If you would rather be using your money to power up companies which are helping the environment and society, you may wish to consider an Ethical Investment Portfolio.
Consider how you want your investments to be managed
What would you rather be doing in your spare time? Some people love to come home from work and dive onto the stock market news. Others prefer to unwind or go out to see friends. However you want to spend your spare time, there is almost definitely an investment plan suited to you out there.
DIY Investing
DIY investing involves a lot of research and dedication, as Benjamin Franklin himself said; “An investment in knowledge pays the best interest." If you want to manage your own investment plan, there is no way around the hard work involved. Staying up-to-date with the stock market, figuring out the best time to buy and sell, picking the right stocks, doing regular checks and managing to keep a good balance is just the beginning. For some people, this is a challenge that they love to get their teeth into. You save on management fees, but you will end up paying with your long-term time and attention.
Do-it-with-me Investing
A middle-ground alternative is known as “do-it-with-me” investing, where investment platforms can offer advice on the best investments to pick. If you want to invest yourself but need some help getting started, this could be a good option. While in some respects you get the benefits of DIY investing with the lower fees, you also get the disadvantages too. You will be paying some fees as well as using your own time and research.
Have a team of managers work for you
Hassle-free investing or “Managed Investing” is a popular option. After answering a few questions online, a team of experienced investment managers will build you a diversified investment plan according to your risk comfort level. You can easily set up, access or withdraw your money securely online, and view your performance 24/7. With this type of investing, you can track your investments on the move, from your phone or laptop.
At Wealthify, we do all the hard work, you simply deposit some money into your investment account and we do the rest for you. Adding automatic monthly payments is straightforward. Everything is managed online, but you can easily call or chat with our friendly team based in Cardiff. Here at Wealthify, we pride ourselves on our low fees and high quality services.
1: Which - Interest slashed for fixed-rate savings accounts
2: IG - What are the average returns of the FTSE 100?
3: Bank of England - Inflation and the 2% target
4: Financial Mentor - Future Value Calculator
5: Wealthify Investment Calculator, Confident risk profile:
This is the projected value for a Confident Plan (Medium Risk Plan). This is only a forecast and is not a reliable indicator of future performance. If markets perform worse, your return could be £72,422. If markets perform better, your return could be £137,076. Values correct as of 17/10/19.
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Past performance is not an indication of future results.
