The Five Minute Beginner's Guide To Investing
August 29, 2022 (Investorideas.com Newswire) Most of us realise that socking our savings away in a conventional account isn't the best idea - you'll earn minimal interest, if any, and risk your cash actually dropping in real-terms value due to inflation.
One of the alternatives is to invest and pick funds, accounts or products that deliver a healthy return, but it can be difficult to know how to get started.
In this guide, we'll explain some of the fundamentals and run through options to find the right types of investment depending on your finances and circumstances.
Three Reasons to Start Investing
So, why can't you keep growing your savings account, building up a tidy nest egg?
The reality is that you can opt for a regular savings product, but the returns won't be close to those available through a low-risk investment.
- Keeping all your savings as cash isn't wise - in an inflationary economy, living costs are rising, while banks and building societies offer interest rates that are well below inflation.
- Investing allows your savings to grow - if you invest £10,000 in a savings account with a 1% interest rate, you'll earn around £510 in five years. Invest that cash in an investment with a 5% return, and you'll make £2,763 in the same period.
- Compound interest is king - when you earn compound interest, you make a return on the total account balance, including all the interest you have already achieved. The 'snowball' effect means your cash grows significantly faster.
Preparing for a New Investment Project
Before you decide whether to buy shares, open an ISA or take out another product, it's best to have a review of your finances and make sure everything is in order.
First, we'd recommend you pay any short-term debts with high-interest charges, such as a personal loan, overdraft or credit card.
There's little point in investing if you're paying more interest charges on debts that you are earning!
Next, you want to ensure you have some cash set aside for emergencies or any unexpected changes in your circumstances.
Conventional wisdom is that you should have around three to six months' worth of living expenses in a savings account.
No investment is 100% risk-free, so having that safety cushion means you won't become stuck if your car breaks down or you need to repair a leaky roof and have all your cash tied up in investments.
Picking Your Investment Products
Once you have worked through the above tasks, you need to set some investment goals and create a clear plan to refer back to when making decisions.
Some of the important questions to consider are:
- How long do you expect to leave your money tied up in an investment?
- What periods are you comfortable with - most investments have a minimum five-year term.
- How much can you afford to invest, and what are you expecting to earn in return?
- Do you have the resilience to cope if your investment value drops?
There aren't any wrong answers, but it's useful to clarify your intentions before you move forward.
From there, you can start analysing the available opportunities and make informed judgements about the right investment approach.
For example, you might opt for an ISA or pension fund to act as a tax-free wrapper, with all your investment products within the fund.
You might choose an investment platform or work with an investment broker or management company to deal with your portfolio on your behalf.
If you don't have a huge amount to invest, this Wonga guide to investing on a small budget offers some great tips for newbies.
The Pros and Cons of Investment Platforms
Most new investors go for an investment platform because the thresholds to invest are low, they are easy to use, and you don't necessarily need in-depth market knowledge.
The platform acts like an online marketplace where you can buy or sell shares or funds and normally have the option of managing your account online or through a mobile app.
It's best to be mindful of the fees attached, such as platform membership fees, commissions on sale or purchase transactions, and management charges if you buy a fund.
Investment platforms can be a great way to get into the world of investment, but you must understand the fee structures. Some less ethical platforms charge extremely high rates, which erode your returns and overall investment value.
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