2020 has been a tough year for many Britons financially. As a result of coronavirus lockdowns, millions of people have either been furloughed and taken pay cuts, or lost their jobs completely. However, there are some people that have actually been able to save far more money during lockdown.
With spending opportunities reduced significantly, many of those who are still in full-time employment have found themselves with more money to save each month.
This is reflected in recent data from the Bank of England (BoE) which shows that households’ deposits increased by a record £25.6bn in May (following strong increases in April and March). That compares to a pre-Covid-19 six-month average of around £5bn per month.
If you’ve saved money over lockdown, that’s great news. But what do you do with it now?
Where to invest savings now
Assuming you’ve already paid off any high-interest-rate debt and sorted an emergency fund, it could be a good idea to invest your savings for the future.
Leave all your savings in a bank account or a Cash ISA and it won’t get you very far. According to the BoE, the effective interest rate on new time deposits was just 0.87% in May. That’s a truly abysmal rate of interest. If you’re earning that kind of interest rate on your money over the long term, you’re only going to go backwards in real terms (i.e. once inflation is factored in).
Invest your money in the stock market, however, and there’s a good chance you’ll build your wealth up over time. Historically, the stock market has delivered returns of around 7-10% per year, on average, over the long run, which is an excellent return. That’s well above the long-term rate of inflation, and far higher than the returns from savings accounts.
Investing has never been easier
Investing in the stock market is incredibly easy these days. Open an account with a reputable provider, such as Hargreaves Lansdown or Interactive Investor, and you can literally be investing within minutes.
My advice would be to open a tax-efficient account, such as Stocks & Shares ISA (where all gains are tax-free), or perhaps even a Lifetime ISA if you’re under 40 (this comes with 25% bonuses on contributions but has restrictions on withdrawals). Then start building a diversified portfolio that contains a mix of UK and international stocks.
Build your wealth
If you don’t want to worry about picking stocks yourself, funds can be a great way to invest in the stock market. One of my favourites is Fundsmith Equity. This is a global equity fund that’s returned about 50% over the last three years. Exchange-traded funds (ETFs) and investment trusts can also help you get diversified exposure to the stock market with minimal hassle.
Alternatively, if you don’t mind doing a bit of research yourself, consider picking your own stocks. This approach to investing can be higher risk. But it can also generate higher returns. For example, had you invested £2,000 in online fashion retailer Boohoo five years ago, that money would now be worth around £30,000.
Just make sure you think long-term. In the short term, the stock market can be volatile. It’s important to be aware of the risks. In the long run, however, stocks tend to produce fantastic returns for investors.
Edward Sheldon owns shares in Hargreaves Lansdown and Boohoo and has a position in the Fundsmith Equity fund. The Motley Fool UK has recommended boohoo group and Hargreaves Lansdown. Views expressed on the companies mentioned 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.