The Beginner’s Guide to Investing

Why Invest?

 

A lot of people are naturally cautious of putting their money anywhere other than in the bank or into their house. They see investing as basically the same as saving, except with a lot more risk and think to themselves, why should I bother investing, if it means I could lose my money? And yes, investing definitely comes with some risks attached. When you put your cash into a savings account you know that money will be safe. You will know that it is protected by the government (up to £85,000) and that it will stay safe and earn a small amount of interest over the years. Investment offers no similar promises. You will be told at every turn that yes, your capital is at risk. Thanks to the way the stock market has performed throughout history, you will be confident to make a healthy profit on your investment but you cannot guarantee it. So you need to ask yourself, why you are investing, and what you want to achieve. You need to ask yourself how much are you willing to invest and how much you are therefore willing to risk? And you need to ask yourself whether those risks are sensible and whether they are worth it? Savings give you security and small growth, whilst investments give you (hopefully) much bigger growth and much less security. Savings are for putting aside for big ticket moments in your life (house deposits, weddings etc) whilst investments are about trying to grow your money for the future. Getting the balance right is what you need to think about before going ahead and investing. 

 

 

 

Preparing to Invest.

 

Part of knowing how much you are prepared to invest is getting your financial situation in full working order before you even think about doing so. This means clearing your all your debts, but especially any debts which are costing you a lot of money every month in interest – such as credit cards. The reason for clearing your debts first is that the interest you pay on most credit cards and loans is in all likelihood more than you will make on any investments you would make, so you would be running at a loss while you still had those debts outstanding. Better to wait, clear the debts and then start investing. Secondly, you need to look at your household budget and draw up a spreadsheet of all your monthly outgoings. Where can you make savings? Where can you trim the fat a little? Do you really need that daily coffee and newspaper or that gym membership you hardly use. Getting your monthly outgoings in a lean, mean fighting fit state allows you to save a bit more each month towards your investments. Thirdly, put aside a bit of money for that proverbial rainy day. It’s all very well investing for the future, but not at the expense of the present. Try to have enough money set aside to live on for two to three months so you can cover your outgoings if you lose your job or get sick. And finally, be prepared to make losses. You should only ever invest as much as you can afford and though the aim is long term growth, in the short term you will occasionally have losses in your investment. If you aren’t prepared for that and couldn’t ride out such situations without panicking, then you should really think about whether you are sure you want to invest? Similarly, if the money you are investing is intended for a house purchase or wedding, then you would probably be better putting it in a high interest savings account and leaving it alone. 

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