With interest rates on savings accounts at rock-bottom levels, it’s hard to earn a return on cash these days. And inflation – the rise in the price of goods and services – makes that a real problem, eroding the value of your cash over time. So while you might be able to buy a slice of pizza with £1 today, five years from now that £1 might only get you half a slice. In short, your money in pound terms will be worth less than it is today.
To get around that, you have to figure out how to get a return on your money. And that’s where investing comes in: by buying up stocks, bonds, or other products, you’ll be able to put your money to work. For example, the US stock market has delivered a 128% return over the past 20 years. So essentially, any money you invested in US stock in 2000 would have more than doubled in value by now.
What’s more, thanks to “compounding”, your returns generate their own returns. Think of it like this: let’s say you invest £100, and over the next year stocks rise 10% – netting you £10. If you reinvest that £10 and stocks rise another 10% the following year, your £110 makes £11. Every year, your returns increase because your overall pot is growing. Compounding helps your money snowball over time: it’s how small investments when you’re young can turn in to large sums when you’re older.
That’s why it’s so important to start investing at an early age. Fortunately, that’s fairly easy to do these days. These tips will help you get started…
Put money aside. If you’re careful about budgeting, you’ll spend less than you earn and have some spare cash to invest. Billionaire Warren Buffett has a famous rule of “paying yourself first”. That means making sure that money comes straight out of your paycheck and into an investment account.
Use a tax wrapper. If you’re in the UK, you can avoid being taxed on your returns by wrapping your investments in an ISA or pension – and in the case of a Lifetime ISA or an employer-pension scheme, they might even offer free money (within reason, of course).
Take your first steps. For anyone new to investing, a robo-advisor might be a good place to start. A robo-advisor will assess your risk tolerance – remember that all investing comes with some level of risk – and put your funds into a range of suitable investments. As a rule of thumb, the younger you are, the more risk you can afford to take on. That’s because although risky assets like stocks can drop in value, they tend to increase in value over the long term more than more stable assets (like bonds). So if you can ride out market crashes, you’ll be better off when you’re older. Robo-advisors charge a small fee, but it’s probably the way to go for a hassle-free approach.
Or go your own way. If you’d prefer to run the show yourself, you might want to open your own investment account. That’ll give you a lot more control over what exactly you invest in, but it’ll also mean you need to be a lot more hands-on and a lot more clued-up. Remember that individual stocks can be particularly risky: index funds – which track the value of all the companies in a particular market – might be an easier way to keep your portfolio “diversified” and reduce your risk.