As interest rates increase, mortgage borrowers on variable rates and those with expiring fixed-rate deals feel the pressure. However, there is some positive news for savers. Unfortunately, the interest earned on savings is still significantly lower than the current rate of inflation, which stands at 8.7%. If you are looking to save for the future, it is important to consider investment options that allow your money to generate higher returns. But where should you begin?
First and foremost, it is advisable to pay off high-cost debts. Experts suggest prioritizing the repayment of credit cards, overdrafts, store cards, and other high-cost debts before venturing into investments. However, this does not mean you have to be completely debt-free before starting to invest. It is important to be sensible and strategic about this. Mortgages, 0% credit deals, and student loans with clear repayment plans can usually be disregarded.
Building a cash fund is the next step. As a general rule, anyone of working age should have three to six months’ worth of essential expenses saved in an easily accessible account to cover emergencies. While cash savings are not intended for high returns, it is wise to choose an account that offers the best interest rate possible. Easy access accounts are recommended for money that may be needed on short notice. However, it is important to be aware of any restrictions. Some of the highest-paying easy access accounts have limits on the number of withdrawals allowed per year.
Once you have established your cash fund, it is advisable to consider investment options for money that will not be needed for at least five to ten years. It is also important to take advantage of tax-free allowances. If retirement planning is your main goal, pensions are usually the best option. Pensions offer attractive tax advantages and may include matching contributions from employers. If you anticipate needing access to your funds before retirement, utilizing the Isa allowance is a smart choice. Investments held in an Isa wrapper are not subject to tax on interest, capital gains, or income. It is possible to split your investments between a cash Isa for emergency funds and a stocks and shares Isa for market investments.
If paying for financial advice is not feasible, you can opt for DIY investing through online platforms and fund supermarkets. These platforms offer a wide range of investment choices, from pooled investment funds to individual shares. Fees and charges vary across different platforms, so it is important to compare options based on your personal circumstances. Starting small and making regular investments is a recommended approach, as it helps spread the risk and allows you to learn and adjust as you go.
For beginner investors, pooled funds such as unit trusts or tracker funds offer ready-made diversification and lower administration costs compared to buying individual stocks. It is essential to view investing as a long-term endeavor rather than a get-rich-quick scheme. A minimum investment period of five years is recommended to ride out market fluctuations and achieve a satisfactory return.
Finally, it is important to be cautious of investment opportunities that seem too good to be true. Any investment that guarantees specific annual returns should be approached with skepticism, especially if the company has contacted you out of the blue. Research and thorough evaluation are crucial before committing to any investment opportunity.
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