Invest some cash!
Once you’ve created a budget and have some money every month available for putting aside, you’ll want to invest some of that spare dosh!
Holding cash can lead to the value of your holdings wasting away, especially with today’s low interest rates. This is because inflation reduces the buying power of your money. Prices go up, but the amount of money in your pocket stays the same.
Investing your money gives you the potential to make that money grow, over and above the rate of inflation. Of course, you also need to be aware that you can lose money with investing. There certainly are no guarantees. The way I look at it though, is that if I can make my spare money work for me and turn into something that could really make a difference to my life, then that is a better use of it than blowing it on a bunch of material things which I don’t really need.
ISA stands for ‘Individual Savings Account’, and they’re a great thing to have, as you can put up to 20,000 GBP* a year (in one, and not pay any tax on the gains you make. There are 4* types of ISA available:
- Cash ISAs
- Stocks and shares ISAs
- Innovative finance ISAs
- Lifetime ISAs
Cash ISA’s are just like ordinary savings accounts. As I mentioned before, you won’t get offered a great deal of interest on the money you keep in one.
Stocks and Shares ISA’s are accounts which let you invest in stocks and shares with the money you put into them.
Innovative finance ISA’s are a new product that allows you invest in peer-to-peer platforms.
Lifetime ISA’s are a new product where the government contributes to money you add, but you can only use that money for buying your first house, or a pension, otherwise you face penalties.
The type of ISA I have is a Stocks and Shares ISA. This allows me to invest in the stockmarket, and gives me access to a multitude of investment funds that provide exposure to the global marketplace.
With a Stocks and Shares ISA, once you transfer some money into the account, you then need to decide what to do with it. The company you open your ISA with is important here, as some offer access to a wider variety of markets and funds than others. Personally, I use Hargreaves Lansdown, as they offer a good range, and have a good reputation.
Now, to some basics about what you can invest in. For the majority of people, investing means stocks and shares, whether that is buying stocks in a specific company, or buying a ‘fund’, which is an investment product composed of a number of companies.
Active and Passive funds
When talking about funds, there are two types to be aware of; active and passive. In a nutshell, active funds are managed by someone, and that person chooses which companies to invest in, whereas passive funds aim to track an index. An example of an index is the FTSE 100, the top 100 companies listed on the London Stock Exchange.
How do you decide between the two? Well, put it this way… active funds are more expensive for you to invest in, and the fund managers who run them are very rarely able to beat the indexes. In 2005, Warren Buffet (probably the most famous investor of all time, for anyone who doesn’t know!), made a bet that:
“Active investment management by professionals – in aggregate – would over a period of years underperform the returns achieved by rank amateurs who simply sat still. I explained that the massive fees levied by a variety of “helpers” would leave their clients – again in aggregate – worse off than if the amateurs simply invested in an unmanaged low-cost index fund.”
I’m not sure what the expiry date of that bet is or was, but he’s certainly winning it by a long way.
Picking your own companies
The alternative to funds is to be your own ‘fund manager’, and choose which individual companies to invest in. My experience of this is that it’s something that requires a strong element of self control and mastery. It’s easy to allow ego and emotions to run the show, which is not a good thing when it comes to making money. It is something I do, but is beyond the scope of this article.
So, on the the basis of the last couple of paragraphs, you can probably guess that in my opinion, the simplest way to invest money is using an ISA account to buy into some passive funds. Using an ISA means that you can have interest free returns if you keep to the annual investment limits, and passive funds are cheaper and generally give better returns than active funds.
*Correct at time of writing