Everyone invests for different reasons – you might want a few extra pounds every month, or you might be saving for a house or a new car. Of course you could use a savings account, but you’ll earn next-to-nothing with it! Your money will be safe, but stagnant.
If you’re looking to grow your money for a long term – two years or more – goal, then you need to put it where it’ll work.
Investing money is a fast way of growing money, but it’s riskier than the humble savings account.
One thing to consider is that your savings account won’t keep up with inflation – you want to keep abreast with price rises, and ideally get ahead of them. You don’t want to be joining the growing number of people using payday loans from www.wonga.com, do you?
Would it make more sense to pay debts off first? Debts are a big drain, so the quicker you get rid of them, the sooner your money will see some daylight. You’ve got £2,000 on a credit card, so pay that off rather than investing £2,000, as the interest payments on your card will be more than you’d earn from your investment.
Once you’re debt free, play even safer by getting insurance – health, job, life cover, house insurance, the works. You might be a brilliant investor, but what if your house needs big repairs, or you can’t work? That’s your savings gone and you might end up throwing yourself upon the mercy of Wonga.com. You should also have that all-important emergency fund – at least six months’ salary. This fund should be easily accessible, like a savings account.
You need to consider how soon you want your money to grow. If you want quick returns, you’ll have to take bigger risks. If you want slow, steady and reliable growth for a distant goal, you’ll need safer bets.
If you’re close to retirement, you need safe investments – you don’t want your money to lose value just before you give up work! Bonds are best here.
If you’re after more growth, and you have more time, then moderate risk is a good idea, so think about a mix of stocks in established and stable companies.
For big gains you need to take some risks. Look for companies that plough a lot of profit back into expansion. You can maintain these investments for a long time to get the most out of the growth.
Being young is an advantage as you’ve got longer to wait for your investments to start giving returns, and you’ve got time to make up any losses. Riskier investments are a better idea for youngsters.
Low risk investments are also good, though, as you’ve got more years for compound interest to work for you. If you’re in your forties and are new to investing, then you’ll need to play it safe. A good idea for determining what percentage of your total investments should be in stocks is to take 120 and subtract your age. If you’re 40, you should have 80 per cent of your investments in stocks.