First-time investing - what you need to know

If you're thinking of investing some money into your future for the first time, you're probably wondering where to start. Investing can encompass anything from a standard savings account at your local bank to stocks and shares. Salary Finance does not give financial advice. Seek help with planning your financial numbers, from a competent financial planner/ coach and use a regulated financial adviser to purchase any investment, pension or insurance products.

If you want to learn more about investment and the best options for you, it’s recommended to speak to a financial advisor. It can be confusing to read up on, but the basics of investing can be broken down like this:

Time

 Stock market type investments - owning a part share in companies like Facebook, BP, Amazon and Tesco - have historically offered the highest returns over the long term. By long term we mean 15 years or more. But stock markets go up and down on a daily basis. Sometimes as much as 40% in one year!. So you have to be very patient when it comes to stock market based investments. In the wise words of Warren Buffett "If you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes''. There’s a lot of excitement around day-trading, but real wealth comes from investing in a diversified portfolio and taking a very long term view.

Inflation

You want to ensure that your investment at least matches the price of inflation. So investments in savings accounts are not the right long-term home for your money, as they usually lose money relative to inflation (e.g. if the inflation rate in the UK is 1%, and your bank account is only giving you returns of 0.4%, you’re actually losing money each year because your money buys less!). Savings accounts are ideal for cash that you'll need in the shorter term or for spending emergencies. In that respect, the interest is less important than the security of your capital. If you already have your emergency fund set up, you’ll want to look at investing in ways that give you higher returns.  Which? Has a very useful beginner’s guide to investing for the longer-term which you can access here.

Contributions

Make sure you know how your workplace pension plan works, and make at least the minimum contribution to get your employer's pension contributions. For most UK employees, your employer contributes 3% of your salary as long as you  contribute  at least 5%.  Some employers will contribute more if you do, so check out that free money. In the early years, the amount you contribute to your pension or any other longer term investment account will usually make more of an impact on the growth of your wealth than investment returns. But eventually investment returns should make a bigger contribution to the growth in your money, once you’ve accumulated some capital.. And check out whether your employer offers other savings incentives like a share save scheme.  

Costs

When you invest, you’ll  have to pay certain costs. The lower the cost of investing the more of future returns you’ll keep, so choose wisely..  And if you pay tax on your investments that will also reduce your returns, so make use of all the available tax exemptions, allowances and reliefs. Make sure you have the full picture before you choose where you want to put your money, so that you’re selecting the option that gets you the most money in your own pocket!

Expected returns

This is what your investment is anticipated to generate. If you choose riskier investments with higher anticipated  returns, they could also be more volatile and lose money. As long as you invest your pension and ISA funds in mainstream investment funds, you have a good chance of capturing returns that at least keep pace with inflation. Choose what your money is invested in just as carefully as what type of account you choose to hold the money in.

Investing isn't rocket science, but it pays (literally) to understand the basics. The simple lesson here is that gaining knowledge, spreading risk, and playing the long game are all routes to financial success. If you want to learn more about investment and the best options for you, seek independent financial advice.