Very few people feel excitement when dealing with their finances; but having a handle on our savings can really pay off in the long run. This is particularly true for young people and yet, according to the BBC, more than half of twenty-something’s in the UK have absolutely no savings what-so-ever. This is a real problem as without any savings long term goals such as purchasing our first home, paying for our children’s education and retiring comfortably can become near impossible. Rising costs of living and a general lack of understanding about financial markets can create barriers for those young people looking to get their savings off the ground.
There are, however, options which can help even those with little investment knowledge and disposable income start to build themselves a nest egg for financial freedom.
Saving vs. Investing
One of the first decisions you will need to make when thinking about your savings is what you are saving your money for. If your goal is to save for something in the short term such as a holiday or a luxury purchase then cash savings are probably your best option. Saving cash is relatively safe and can be done easily through your bank or building society.
If on the other hand you are saving for some bigger, long term goal such as your first home or retirement, then cash may not be your best option. Cash savings generally attract a fairly poor interest rate, which may not matter in the short term but, if held for a longer period, could end up falling behind inflation. This means that whilst the amount of cash you have saved shouldn’t go down, the cost of what you are saving for could go up faster than your savings meaning you are effectively losing out.
If your goals are set in the long term then you may be much better off investing your money in the stock market. Whilst this does carry more risk, it also offers the potential to grow your money much faster, either through capital growth, dividend income or a combination of both. The level of risk you take on can be managed by choosing an investment product which suits you.
Choosing your investments
There are a wide range of investment options which can at first feel completely overwhelming. However, whilst there are all sorts of unique investments available, most of the simpler ones can be broken down into four categories:
- Stocks and Shares: Companies that want to grow and expand often need to raise money to do so. One option for them to do this is to sell a part of their company in the form of shares (also referred to as stocks or equities). By owning some of these shares you then own a part of that company. These shares are usually listed and traded on a stock exchange (such as The London Stock Exchange) where investors can buy and sell shares in different companies. By owning shares you could be entitled to regular payments of dividends, earning you income. You could also earn money if the price of the shares rises whilst you are holding them, allowing you to then sell them at a profit.
Bonds: These are another way for companies to raise money to fund their business. Each bond effectively represents a loan from you (the investor) to the company, with an interest rate which is either at a fixed rate or a floating rate relative to the bond. These can be a good option for long term income
- Gilts: Very similar to Bonds, but rather than being issued by a company, these are issued by the UK government. In essence it is a loan from you (the investor) to the UK government. Generally theses are considered to be lower risk than bonds, but also usually pay less interest.
- Funds: Think of these like large collective investments where you and other investors pool your money together. The fund manager then uses this money to buy and sell a wide range of investments on your behalf. There are all sorts of different funds out there which invest in different things, the type of investments that the fund will be made up of are outlined in the funds Key Investor Information Document (KIID) along with a rating for the funds risk level.
Out of these four, funds are arguably the best option for new investors wanting growth or a mixture of growth and income. You don’t need to be an expert on the world of investing since the fund manager will manage the investments contained within the fund. You also gain exposure to a wide range of investments at a relatively low price, allowing you to spread your risk. When buying funds through a broker there is usually no minimum amount for purchases meaning even those with very little to invest can start to build up their holdings.
Many brokers will even offer a special Ready-Made ISA which is made up of funds to suit investors with different appetites for risk. These are usually easy to understand and come with very low fees making them a great option for new investors.
Final Things to consider
Any kind of investing does carry risks; the value of investments can go up and down so there is always the possibility that you will lose the money you have put in. It is therefore important to choose investments with a risk level which you are comfortable with. You should also consider the length of time you are planning to hold your investment. Investing over the short term carries higher risk as there is less time for your investment to recover should the market drop.
However, if you are planning to hold your investment over a longer period of time then this risk is mitigated since you can wait to sell your investment until its value has come back up. Also think about how much you can afford to invest. Regular and consistent small deposits have the potential to grow over the long run and offer the best risk mitigation.
If you’re keen to get started but don’t know where to begin, investing in Funds may be the best option for you. The risk is lower, and with a Ready-made ISA or Multi-manager fund you can leave the decisions to the experts. If you wanted to give investing yourself a go, you could buy into funds in sectors that interest you, like technology or healthcare. There is also a growing interest in socially responsible funds where you can invest in clean water initiatives or companies that promote diversity.
A good piece of advice is to only invest in what you know. Whether that’s through Shares, Funds or any of the other types of investments available, it’s a good idea to understand what it is you’re buying into.