If you are new to investing the first thing you may wonder: why bother at all?
Maybe you’re building a stash on your savings account and think that’s enough. Let’s take that example to illustrate why you should start investing, and a checklist before you begin.
In our example we have two neighbors. Both have saved £10,000 but decide to do different things with it.
Neighbor A puts the money in a savings account for five years with a 1% interest rate. After five years they have £10,510. They’ve gained exactly £510.
Neighbor B invested it in stocks with an average return of 5% over five years. At the end they have £12,763. They’ve gained £2,763. Over 5X more than Neighbor A.
Normally you wouldn’t save or invest once, and those amounts would grow over time. Because interest works on a percent, the more you invest or save, the more you receive. It compounds over time.
Imagine each Neighbor didn’t invest anything more than what they received in return. Neighbor A would add £510 to their savings earning 1%, while Neighbor B would add £2,763 to their portfolio earning 5%.
Over time the return on Neighbor B’s gain would surpass the 5X to 7X, 9X and so on.
Checklist Before You Invest
- Pay off expensive debt with high interest such as credit cards. If you don’t the high interest being charged on your debt will negate the positive interest you’d earn on investments
- Make sure you likely won’t need to access the money you invest. Have an emergency fund already in place, which is roughly three to six months living expenses saved up
- Choose an investment platform with low fees. Especially as a new investor with limited funds, you don’t want fees eating up your returns
- Set a budget. Decide how much you can afford to invest each month so that your money is always growing. Develop a plan for retirement. The earlier the better. Your first job, even at 18, is a great time to put together a plan. Parents, do this for your kids
- Choose a tax-free wrapper. This will be between ISAs (stocks and shares ISA) or Pensions. You’ll get government tax benefits
- Choose between buying individual shares, a managed fund (always check fees and average return track record) or ETF (this is a pool of pre-selected companies but is bought like a stock)
- Join investing groups and consider a robo-advisor (like an AI financial advisor)