Most of life’s big decisions are a little daunting and investing your hard-earned cash is no different. Should you throw yourself off the top board into shares or retreat to the shallow end of a savings account? And how can you tell which option is best for you?
At this stage, many people find the thought process too time-consuming and park their money in the bank anyway. But actually it’s easy to work out whether you’re ready to take the investment plunge. All it takes is a glance at your current finances using this simple three-point plan:
Review your borrowing.
Interest on credit card spending, overdrafts or unpaid bills rolls up quickly and sinks you further into the red. You must pay these off before you even consider saving, let alone investing.
Create a cash cushion.
Having cleared your tab, the next step is to build an emergency fund. You may never need to use it, but you’ll be so grateful for liquid assets in a crisis (hello COVID-19!). Budget for three to six months’ worth of salary (or monthly outgoings).
Add to your workplace pension.
The government refunds the tax on the amount you save at your marginal rate (basic or higher) up to a certain limit. Your employer also has to make a contribution. This is essentially free money - you’d be daft not to take it.
Ok, I'm ready
Done all of that? Great, you’re ready to invest - almost. There’s one final hurdle. In technical terms, this is called your ‘attitude to risk’ or, in everyday language, how allergic are you to losing money?
Shares do carry a very real risk of denting your wealth. For this reason, you should only invest money you can afford to lose. And, if you need the money quickly (within five years) or are of an extremely nervous disposition, you are best off keeping the cash in the best savings account you can find. You could also look at lower-risk assets such as bonds (government or corporate debt) and property.
The good news is that there are some strategies for getting over the risk bump. Firstly, it’s sensible to spread the risk by investing in shares from lots of companies in various sectors or industries rather than those of a single firm. This is easiest done through an investment fund. You can invest in bonds and property in this way too. By spreading your money across many assets, you achieve a level of diversification which is helpful to spread risk and smooth out volatility.
Second, time, as we know, can be a great healer. Given ten years or more, stock markets usually recover from a downturn. The longer you can invest for, the better.
Lastly, investing a small amount regularly is often more productive than the occasional large lump sum. Investing a fixed sum every month can help you buy more shares when they are cheaper and less when they are expensive – a great discipline and zero effort for yourself.
Investing does seem complicated but, once you look into it, the concepts underneath are quite simple. Take a deep breath. Now could be the time to put your toe in the water.
The information in this post is not financial advice, it is provided solely to help you make your own investment decisions. If you are unsure about whether an investment is appropriate for you, please seek professional financial advice. You can find more information here.
When you invest you should remember that the value of investments, and the income from them, can go down as well as up and that past performance is no guarantee of future return.