Investing for the future. How do investments work and where do you start?
Investments are a great way of making your money work well for you. In the current economic climate where interest rates are very low, you could be losing out by keeping your money in a savings account in the bank. Investing in stocks and shares could help you achieve greater returns and help you reach your long term financial goals that you have been thinking about for your retirement or your children’s futures.
It is a big step to take for the first time when you think about Investments and Investing for your future. There are many different options to take and it can be overwhelming and downright confusing for anyone who has not looked at it before.
Here is a quick guide to what you need to think about before you start and how investments work.
Are you ready to invest?
You should have several things in place before venturing into the world of investments. There is an element of risk involved with any investment, some more than others, so it is worth thinking about how you feel about taking a risk with your hard earned cash.
You don’t need to be afraid of it, just aware that you need to be prepared for the fact that you could lose some or all of your money depending on the risk you are prepared to take.
So, first things first, here are the things you need to consider:
Understanding the risks
If you have a good long time frame and plenty of spare cash to fall back on , then it’s not so much of a risk, but if you think that you will have sleepless nights if the market is not performing as you would like it to, it’s worth going for something less risky.
Paying off any debt
It is sensible to pay off any debt before you start, or at least get your debt down to a manageable amount. This is because the interest you are paying on your debt could be more than the payments you could receive from your investments, so you would not make any money.
How much can you realistically afford? Assess all your incomings and outgoings and make sure that you have the spare money to put aside, otherwise it’s not for you if you know you will need that money within the next five years.
What do you want to achieve?
Set a clear goal for yourself. What is it you want to achieve? Do you just want a regular income or are you looking for a lump sum further down the road. This will tell you how much you need to invest and in what time frame. This will also tell you how much of a risk you will need to take.
If it is a short term goal (less than 5 years), you may want to stick to savings as your investment may not return what you need in a short period of time if they fall in value. If it is a medium to long term goal (5 – 10 years +) then investing is more appropriate, however you need to think about your age and state of health to make sure that if a long term investment falls in value, you still have the means to earn to build it back up again.
Regular income versus lump sum
If you are comfortable with risk and know what you want to invest in, then a lump sum is the way to go. If you are more cautious and want to see a regular return, then regular savings is the way to go.
A lump sum is investing all your money in one go.
This is where you would invest say £10,000 on the stock market at once, whether it is in bonds, shares or units in a trust. They are bought at the same price and you can benefit from any price rises straightaway. The downside is that if whatever you have invested in goes down, then all of your money will too. This is where long term investing can work as it gives the market time to recover. So you have to keep a close eye on the markets regularly.
Regular savings, otherwise known as ‘pound cost averaging’.
This is where you regularly invest a set amount each month into your chosen shares over a period of time. If the share price goes down one month, you will be able to buy more shares for your money, so by the end of the time period you could end up with more shares, than if you had put a lump sum in. Also if the share price drops, only the money you have in at that time will be affected rather than the whole lump sum. The only downside is if the share price continues to rise over time, you will not benefit as much as you won’t have all of your money invested at any one time.
Do you have savings?
According to Which? They say that as a rule you should have three months of savings to fall back on as an emergency fund. http://www.which.co.uk/money/savings-and-investments/guides/the-beginners-guide-to-investment/
Prepare for the unforeseen
Make sure that your income is protected before you invest. It’s worth ensuring that if you couldn’t work for an extended period of time that you and your family will be able to pay the bills.
Think about retirement
It’s worth thinking about a pension before you invest. Pensions benefit from employer contributions and tax breaks which will are much less risky than investments for your retirement. If you already have a pension, then you can think about investing any spare cash you have to boost your pension once you retire.
Are you ready to Invest?
Seek financial advice
There are so many options available that it is worth talking to a professional who knows the market and can advise you as to what option will suit you best. Why not get in touch with one of our friendly female advisors who can sit with you and go through your options and work out what is best for you.