#6 - Making a start investing
In 2022 we saw interest rates rise and now in 2023 the Bank of England base rate is sitting at 4% meaning there are some decent savings rates available both for fixed term and easy access accounts.
These are great for emergency funds as having cash on hand to pay for unexpected expenses and emergencies is very important but once you have a cash buffer you should start thinking about making your money work harder.
If you can free up a little cash each month or have some savings that you don't plan on touching for at least 5 years, then you ought to consider investing the money in the stock market.
The average stock market return is widely quoted to be around 10% per year. This figure is based on the performance of the S&P 500; the 500 largest companies in the US. This shows that keeping your money in cash savings means you are missing out on the extra growth that could be had from investing.
Investing comes with risks and you can lose money, particularly if you sell during a downturn, however looking at the stock market the general trend over time is up. If you have a long-term horizon (at least 5-10 years) then investing makes a lot of sense.
There are two main ways to invest; funds and indexes or individual stocks. Individual stocks are shares in companies that you may have heard of and interact with such as Microsoft, Amazon, Sainsburys or Lloyds Bank. These companies are listed on stock exchanges, and you can purchase shares in them with the expectation that over time they will increase in value.
Funds and indexes are basically baskets of stocks. For example, the FTSE 100 index fund is the 100 largest companies in the UK that are listed on the London Stock Exchange, this includes some big names you will likely have heard of such as Barclays Bank, BT Group and Next plc.
If you are starting out, I’d recommend looking at investing in funds and indexes. Choosing individual companies to invest in should involve reading up on them and studying their financial accounts before deciding if they will make a good investment, otherwise you are basically gambling. This is an incredibly time-consuming task and requires a degree of knowledge around finance that many people just don’t have. With an index fund you are investing in all the companies in that particular index. This means that you don’t have to look for “winners” and won’t risk losing everything if you pick a “loser”.
In the UK we have something called an ISA (Individual Savings Account) and this is a special wrapper around your investments to shield them from tax. You may already have a cash ISA but if you are going to invest in stocks I would recommend doing so in a Stocks and Shares ISA. It may not make much difference at the beginning but as you increase the amount invested you will find yourself exceeding the tax allowances that are available and will be liable for dividend and capital gains taxes. This is what makes the ISA such a great option.
If you are thinking of investing in the stock market, there is one more thing to consider and that is what platform to invest through. In the UK there are many available but if you are just starting out, then I would recommend choosing an investment platform from a recognised name such as Vanguard.
Vanguard’s fees are low, they are an established name, and they have great customer service, the only downside, if it is one, is that you can only invest in their own funds, and you cannot buy individual stocks. If you want to invest in non-vanguard funds or purchase individual stocks, then Trading212 is a good option.
I hope this has proved helpful and if you are interested to see what investment apps and platforms I use take a look at my Finance Apps page.