Let’s be honest. It’s intimidating to start investing. The amount of information thrown at inexperienced investors is overwhelming. There are the stock picks. The under-the-radar gems. The must-buys and the can’t-misses.
You can make the decision to start investing and after weeks or months of reading, end up more confused than when you started. It certainly happened to me.
Even the very best easy-access Cash ISA will only give you a maximum of 1.4% interest on your money in 2020. That means if you left £10,000 in a Cash ISA, by my calculations, within 10 years you would see just £1,491.57 added in interest. Add in the cost of inflation over the course of a decade and your gains will be worth even less.
The fact is that UK savers are penalised in the low interest rate environment we have right now. The longer you keep your money in a bank account or Cash ISA, the lower the future purchasing power of that money will be.
It’s frustrating to feel like you’re doing all the right things, like saving for the future, and yet to go unrewarded for it and see the value of what you’re saving drop over time.
Thankfully, there is something you can do immediately to make yourself richer.
The very first thing that will help you to start investing in 2020 is to open a Stocks and Shares ISA. This is an account you can transfer money into that offers you the opportunity to make gains tax-free. As of 2020 you can add a maximum of £20,000 a year into this account.
When the share price of a stock or fund you’ve bought goes up, you make what is called ‘capital gains’. Most companies also pay you a small amount every financial quarter as a reward for holding their stock. This is called a dividend, and is expressed as a percentage. You’ll see writers like me saying certain stocks have, say, a 6% yield. Higher yields will make your money grow faster.
When you re-invest dividends — and most Stocks and Shares ISAs will allow you to do this with a simple tick box — you take advantage of the power of compound interest. £10,000 in a Stocks and Shares ISA at a 6% yield will, by my calculations, add £7,908.47 over 10 years.
If you don’t use a Stocks and Shares ISA to invest, then you will pay a proportion of your capital gains and dividends to the tax authorities every year. Don’t get me wrong, I’m all for tax. It helps to pay for the NHS, for roads and schools and lots of important things, but you’re likely already paying a decent chunk of tax direct to the government from your salary or self-employed income.
How to win at investing
When I made the decision to start investing I looked to the world’s richest and best-known investors for advice.
Warren Buffett is a straight-talking investing legend. He says you should research stocks for a long time before ever buying anything and then let compound interest do its job. Ignore short-term fluctuations and try not to check your portfolio every day, he adds.
This is very difficult as investing is exciting! But trust the process. You’ll thank me for it as you move to a richer and happier future.
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Views expressed in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.