How To Start Investing
Welcome to the Fool’s guide on ‘Getting Started in Investing’. We’re going to cover a wide range of topics such as:
- what to do before you start investing;
- setting out your investment objectives;
- your main investment options;
- why The Motley Fool prefers investing in shares;
- various vehicles you can use to invest;
- why we like index trackers and regular investment plans;
- how to pay less tax;
- where to go for more detailed information on investing; and
- how to think about the new pension freedoms introduced in 2015.
But first, let’s spend a moment thinking about the difference between saving and investing.
Saving vs Investing
On the face of it saving and investing seem like the same thing. They are both things that we do with our spare money, after all. But deeper thought suggests that there is a difference between them.
Saving is almost an unconscious act where we put money into deposit accounts, or even an old jam jar on the sideboard, so that we have something for that proverbial rainy day. It is a way of giving our ordinary life a bit of security, so that we don’t find ourselves strapped for cash at some point.
Investing is usually more of a conscious decision. It is about making plans for the future so that we know we can cope with expensive events like retirement or weddings.
When you save money, your capital is secure. You are (usually) guaranteed to get back the sum you put in, plus a little bit of interest.
When you invest you have no such guarantee. Your capital is at risk, as you will often hear. Because of this, you can expect to get more back than you put in, plus a little income on the side. So when you consider any investment you need to ask yourself a few basic questions:
- How much extra return can I expect, and with how much probability?
- Do I really understand what I’m investing in?
- Do I appreciate the risks I’m taking, and how volatile this investment could be?
Before you invest…
You need to make sure the rest of your finances are in order before you start investing.
Firstly, you need to get out of debt. By this we mean all debts apart from your mortgage. So you should pay off your credit cards and any personal loans you may have. The reason is quite simple. It is unlikely you will make more money from your investments than you will pay in interest on your debts. So, financially, it makes a lot of sense to pay off your debts first.
Secondly, you need to put some cash aside for emergencies. How much cash is appropriate will depend on your circumstances. If you have dependents, or if you are uncertain about your job prospects, then you might more put aside than others. One rule of thumb is that you should have enough cash set aside for at least three months’ living expenses.
Last of all you need to be prepared to invest your money for a minimum of five years and preferably a lot longer. Although you can expect to get more from investing than saving, the value of your capital will fluctuate all the time. If you need the cash back in less than five years, then there’s a reasonable chance it could be worth less than the amount you originally invested. You also need a decent amount of time for the miracle of compound returns to work its magic.
In short, if you want to use your money to put down a deposit on a house or buy a new car, then investing is not the best way to do it. If you need a guaranteed amount of money within less than five years, something like a high-interest savings account is a much more sensible option.
OK, now the pleasantries are out of the way, we can get cracking. Simply click on the links below to move between the sections of this guide.