Personal finance is an area that many people have room to improve in their lives. Saving, investing, boosting your credit score and creating financial stability are things that people often talk about and yet many don’t truly understand what they mean. In the case of investing, we’re here to talk about that today.
What is investing?
In the most basic terms, investing is using money to make more money down the line. It’s slightly different from saving which is about pooling money for a goal such as buying a house, going on holiday or building an emergency fund. Investing should be carried out with the long-term future in mind and to make the most of your money.
Why should I think about investing?
Investing is the best way to grow your wealth over the long term. Unlike simply saving, the money you invest should help to earn you more money and maintain the value of your funds against inflation. If you leave savings in an account for decades, you’ll essentially be losing money because inflation will outpace your interest rate (most likely).
So, investing is for growing your nest egg into the future and many even use it to provide financial freedom as they get older. It’s all about financial stability too and giving yourself a financial platform from which to build the life you want. Money can earn you money, but you’ve got to invest it wisely.
Why is risk an important factor to consider?
Risk and reward is the fundamental principle that underpins investing. Before we get to that, it’s important to say that with any sort of investment, you do run the risk of losing money. You’re never guaranteed returns.
The principle of risk and reward is this: the more risk you are willing to take on with your investment, the greater your potential returns can be. But the greater your potential losses may be at the same time. Some investors prefer safety and security over quick cash, while others want to grow wealth as quickly as possible.
What can I invest in?
You can invest in anything that is going to help your money grow. This can be a business start-up, property, stock and shares, index funds, bonds or savings accounts. Each offers a different level of risk and an associated level of reward.
Bonds and savings accounts are reliable but low earners, while property, business and stocks are more volatile but can earn you greater returns year on year. You need to weigh up your financial goals and how much risk you’re willing to take on before you decide anything.
Where can I invest as a beginner?
This depends on what you want to invest in. For beginners, it’s best not to get too overwhelmed by all the different investment avenues. Shares, bonds and funds are some of the simplest to start with.
Perhaps the best options for newbies are stocks and shares ISAs which essentially allow you to deposit money which is then invested by a professional fund manager. Alternatively, you can select your investment options if you like to do your own research and get more hands-on. Another option is an index fund which tracks the performance of entire financial markets. All of these allow you to invest for the long term without needing to do too much admin.
Investment platforms such as Vanguard and Nutmeg offer plenty of products and services to help you invest, but make sure you understand what you’re signing up for.