You may hear a lot of talk in the media about where you should and shouldn’t be investing your money. But what if you haven’t established any kind of savings or investment pot yet? Where do you start?
Some useful points to remember when judging options is that any ‘investment’ should have an expected positive outcome, and anything less is ‘speculation’. Successful investing relies on taking a longer-term view, as markets change quickly and often with magnitude, so short-term ‘offers’ when analysed are ‘little more than gambling’.
In this article, we explore tips and strategies for helping you get started on your financial planning journey.
Step 1 – Working out how much you can afford to save each month
Unless you’ve been fortunate to be gifted a lump sum, it’s likely you’ll want to start saving monthly to establish your ‘portfolio’.
We usually recommend that at least 3-6 months’ worth of expenditure is retained in ‘ready cash’, before you think about committing any of your savings to investment. This pot of money provides a safety margin, as it can cover unforeseen demands for cash without having to disturb your longer-term savings goal or having to sell any investments at a loss.
Step 1, will therefore be to work out your monthly outgoings, versus your net income (after tax etc). The difference is your monthly surplus income and is, in theory, the amount you can afford to save. We would recommend saving this initially into an instant access savings account, as this will be your ‘emergency fund’. Once you have accrued the recommended minimum level of cash, then you can move on to Step 2.
If the difference between your income and spending is negative then it’s likely you’re getting into debt before the end of the month or dipping into any savings you do have. In this case, you’ll need to reassess your outgoings and identify any areas where you can lower your spending. If not, over time the monthly shortfall could mean you accumulate potentially large debts, which can be a vicious spiral to try to get out of.
Step 2 – Deciding what you are saving for
If you have a specific savings goal in mind, you will have a target amount and target date to aim for. The target date is an important factor in deciding how you will save towards it.
If you are saving more generally ‘for the future’ this might give you a little more flexibility.
Shorter-term – For example, if you want to save, say, £25,000 towards a house deposit in 3 years’ time, you will need to commit to saving around £695 per month for every month of those 3 years. Given the short timescale, you are unlikely to want to invest very much, if any, of it into any stock market investments, such as shares. The value of these investments can go up and down sharply in a short space of time and a dip in value near your target date could ruin your plans.
You might want to set up different pots for your short-term savings, and label the accounts, such as “Holiday”, “House Deposit”, “New Car”, and “Spends”. This could help you stay on track with more of your individual goals, rather than one pot that you might delve into occasionally.
Medium Term – These would be your savings goals for in, say, 4 to 10 years’ time. Your new car fund or house deposit fund could fall into this bracket, which might allow an element of stock market investing to be suitable, or perhaps childcare and school fees if you’re planning a family.
Longer-term – If you are thinking much longer term, say your retirement fund, you could have more than 30 or 40 years to your target date. In this case, you could afford to invest highly into equities, for the potential long-term growth, in the knowledge that the upwards trend of stock markets over the longer term will usually compensate for any short-term volatility.
Step 3 – Deciding where to save
You’ve decided on your budget and your goals, and now you just need to decide where to save.
For your cash savings, this is easier to choose. Most people will have at least one savings account with their main bank, and you can also shop around fairly easily by using the online comparison tools.
For your more medium and longer-term investments, where you might be considering some element of stock market investing, we would recommend seeking the advice of a qualified financial planner, rather than relying on the current “sweetheart” recommendations in the media.
Different investments offer different incentives too. For example, for your retirement planning, you could look at a personal pension, where the Government “top up” the amount you invest by giving you tax relief. A basic rate taxpayer investing £80 per month will receive an extra £20 (based on current tax legislation), equivalent to the 20% basic rate tax they may have paid on the income. This also applies to non-taxpayers and so can be a very efficient way of saving for them in particular.
ISA accounts, whilst new accounts don’t offer an initial incentive, allow your cash to grow tax-free, and the withdrawals are all tax-free too. You can have a cash ISA and an investment ISA, and which one, or combination, you go for will likely be dictated by the time frame you’re investing for.
Again, a financial planner will be able to guide you on the right path for you.
Invitation
Interested in finding out how we can help you establish your financial plan and investment strategy? Perhaps you already have a plan in place and you’re interested in getting your children into the savings habit. Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. You can call us on 01869 331469.
This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).
