Turn your savings into successful long-term investments
Guest post by Mike James
For anyone keen to make the most out of their finances, it’s essential to have a good understanding of the difference between saving and investing. Equally important, you should be doing both within your budget and as part of your wealth building plan.
Saving means putting money aside on a regular basis. With proper budgeting, you can make sure that your outgoings are less than your income, leaving you with something left over to put into a savings account every month. Being able to manage your household budget is at the heart of being financially successful.
Once you’ve built up sufficient savings, it won’t make sense to keep your capital in a savings account, since the amount of interest on offer will be very small. Over the last few years, interest rates have been extremely low; the Bank of England base rate is currently 0.5%. Coupled with rising inflation, leaving your savings in the bank could actually erode their value over time.
For the best chance to grow your savings and build wealth, you should now be thinking of investing your money. Generally speaking, stocks and shares, mutual funds and bonds will return much higher interest rates, and you may get to a point where the amount you contribute each month will be less than the growth of your investment. That’s when your wealth really starts to build.
Investing is not without risk since the stock market does not guarantee a return and can fluctuate widely in a short space of time, taking your investments with it – which can be a good or bad thing. If you are thinking of investing your money, taking professional advice is highly recommended. For the ultimate peace of mind, choose an experienced wealth planner who is authorised and regulated by the Financial Conduct Authority. For a good start, see this recent update from George Ide wealth management specialist John Atkinson, on being careful before leaping into investments.
Next, follow these 7 steps to turn your savings into successful long-term investments.
#1 | Be prepared for emergencies
Before you commit to tying up your money in a longer term investment, make sure that you have emergency cover in place, in case you should lose your job, develop a serious health issue or unexpectedly need quick access to funds. As a general rule, you should put aside the equivalent of 3-6 months’ worth of household bills, or 3 months’ salary.
#2 | Set your investment goals
Whether you are saving or investing, your motivation will be greatest if you have a clear goal in mind. Are you saving for a holiday? Putting money aside for a deposit to buy a house? Building up your retirement fund? Accumulating wealth for its own sake may not give you sufficient focus to stay strong when temptation comes your way.
#3 | Income or capital growth
Your investment goals will also determine whether you should choose an investment that delivers a regular income, capital growth, or a mixture of both. Are you building a future retirement fund or a nest egg to provide for your grandchildren’s education? Or are you wishing to supplement a pension you’re already taking?
#4 | Determine your risk profile
Unlike savings, investments always carry an element of risk. While conventional wisdom would suggest that the higher the risk, the higher the return, not everyone has the same attitude to taking risks. Would you be prepared to lose some of your money? Before you decide on specific investment vehicles, it’s important to decide what your personal tolerance for risk is.
#5 | Do your research
Before you commit any funds, it is crucial to understand where you are putting your money. Learn about the stock market and how to trade in stocks and shares, the various investment vehicles available and their pros and cons. Read and follow the markets, and research individual companies’ investment performances in detail before you invest. If none of this appeals, find a good independent investment adviser, fund manager or stock broker to provide professional help.
#6 | Spread the risk
Whether you have a cautious or aggressive risk profile, it’s always sensible not to put all your eggs in one basket. Diversifying your investments means spreading your risk, which is the best possible protection against market uncertainty. Your investment portfolio could, for instance, include bonds, equities and funds, as well as property.
#7 | Think long-term
While easily accessible savings accounts and cash ISAs may be the perfect vehicle for short-term financial goals, investments tend to have a timeframe of 5+ years. Playing the long game means that your commitment shouldn’t waver in the face of short-term market fluctuations, as the overall upward trend of your investments is all that matters.