Some of us may have money sitting in a current or savings account. We want to make our money work for us, but don’t have an idea where to start! Here are some basics to investing that could help you figure it out.
Yes, we’re finally talking about the tricky word: investing!
If you’ve followed some of our previous blogs on smart ways to save money and different ways you can take control of your cash, you’ll know that putting your money away in a savings account regularly isn’t the only way you can grow your money.
One way to keep up with inflation, and make sure your savings are growing and worth more a few years down the line, is through investing. NerdWallet said that the average investment return on stock markets has historically been 10% (that’s usually more than you would get back on a savings account!).
You do also have to keep in mind that investing doesn’t always mean a growth in money – it depends highly on the market and how well it’s doing, so you could realistically lose money too. There’s a risk involved.
Following the pandemic, there are lots of young people starting to invest their money. Finder’s survey found that 75% of both Gen Z and Millennials already have or are considering investing their money.
What can I invest my money in?
You can invest in lots of things – houses, cars, jewellery. And after a few years, the value of that investment could’ve gone up.
In this blog, we’re focusing on investing in the stock market (because that’s what lots of us think of when we think ‘investing’). But we’re not talking the exciting or high-fi investing you may have seen in The Wolf of Wall Street – we think DIY investing should actually be pretty boring – or at least Jordan Belfort would think so!
When you invest in stocks and shares in the market, you’re basically buying a chunk of the company you’re investing in. So, if that company does well, so does your money – and the more profits they make, the more your money grows. Obvs it does work the other way around too – if they lose, you lose. But that’s where the research and trends come in – the more research you do, the more of an informed decision you can make on whether or not the company you’re choosing to invest in will do well. You’re kinda making a prediction…
If you’re still worried about putting all your eggs in one basket – don’t (the one place Love Island actually references investing?!). You can also invest your pot of money across lots of companies. So even if a few don’t do so well but others do really well, your money is still safe, and growing steadily. Balance your losses!
And there you go, you’ve just learned about diversification!
If you’re unsure of which companies to invest in, or simply don’t have the time to research all the companies and get to grips with their performance (who does?!)) you can invest in something called a fund which already comes with a basket of different companies you can invest in. So instead of mixing your own drink, just get a pre-mixer and you’re sorted.
How does my money grow through investments?
So, savings accounts are growing through interest rates, right?
With investing, your money grows in two ways:
The company (or companies) you invested in are doing well, so the value of your shares or investment grows. That means you can sell them for a higher price than you bought them for.
Your shares pay dividends (just like interest on a savings account). So, when a company makes a profit, they’ll pay some of that back to shareholders (you) in the form of dividends. This is because when you invest in them, they essentially use that money to grow their business, so it’s kind of their way of saying thanks for believing in us!
Top tips for beginner investors
It might seem like investing is just for the mega rich, and you can only invest if you have a certain amount of money – wrong!
It’s true that the more money you invest, the bigger the chances of growth, but you’ve gotta start somewhere to build your foundation (and your confidence) right?! The best place, imho, to start investing small amounts is through a Stocks and Shares ISA, which we’ve discussed in more detail in our what type of ISA should I get blog.
Of course, it’s great if you’re able to get expert advice from a financial adviser, but it’s also not necessary. If you’re considering going the DIY investing route, here are a few things to keep in mind:
Only invest if you won’t need the cash for at least five years. That’ll give your money time to ride out any ups and downs in the market and it’s more likely you’ll get a better return and not lose money
Only invest if you understand what you’re investing in – do your research!
Only invest what you can afford to lose. So, think worst-case scenario and if you’re okay with losing everything, you’ll still be okay. At the end of the day, it’s still a gamble.
The higher growth you want to see on your money, the more risk you should be willing to take. Take Bitcoin investing for example – those who got in early might’ve made a lot on their money, but there are also those who’ve had major losses.
Playing it safe with investments
It can be tempting to put all of your money into investments, especially if you’re eyeing a long-term savings goal you’ve been trying to hit.
But there are ways you’ll need to play it safe too. Don’t invest all your cash, keep some money aside in an easy access savings account as your emergency fund. You never know when you might need access to cash in the short-term and you don’t want it all tied up in investments that could have dipped in value at the point that you need the money.
Or you could even consider getting income protection insurance, as a bit of padded back-up. It’s basically a financial product that replaces your income if you can’t work due to illness or injury (your income could stop, but your expenses like your rent, bills and food won’t!), so if ever you can’t work, you won’t need to cash in your investments (which may have dropped in value) and can instead rely on your insurance. You can find out more about income protection insurance here.
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Conclusion
Investing can be a great way to go grow your money, but it’s important to know that it does come with some risk, it’s always a bit of a gamble but not quite as much as throwing all your money on a Blackjack table in Vegas…
So, it’s always good to do your research, talk to friends or family or even a financial adviser and underpin your investments with some sensible safety nets. Investing isn’t for everyone, but if you feel ready to take the first step, follow our beginner tips above to reduce your risk and build your investing confidence.