January is a notoriously difficult month for household finances, and following the first payday of the year many will be looking for ways to make t
January is a notoriously difficult month for household finances, and following the first payday of the year many will be looking for ways to make their money stretch as far as possible. With skyrocketing cost of living, many have been forced to neglect their cash savings but a savings expert has explained how people can get the best bang for their buck in these trying times.
Barclays Smart Investor poll found that one in four Britons are looking to invest in the stock market this year, with 31 percent seeking long-term financial security as their end goal.
The past two years have seen cash savings battered by high inflation and low interest rates, causing many to lose their faith in the traditional savings method.
It’s clear that Britons are willing to turn towards investing for their long-term goals such as retirement, safeguarding their children’s future or buying a home.
However, investing is an often feared element of finance, both for its complexity and because capital is at risk.
While the majority of people think the potential rewards of investing far outweigh that of cash savings, the general idea is that cash is risk-free.
However, inflation can gnaw away at cash savings over time, an impact that is worsened by low interest rates – meaning a person’s cash could have less purchasing power than when they started saving.
Clare Francis, Director of Savings and Investments at Barclays Smart Investor shed some light on how cash-strapped savers can start their investing journey in 2022.
Ms Francis cautioned that savers should not abandon their cash savings entirely in favour of investing, noting that the ideal would be to have both in one’s financial plan.
“Whilst there is always some level of risk with investing, cash is not totally risk-free either. Whilst you won’t see your cash savings rise and fall as you might with investments, the impact of inflation can erode the purchasing power of cash over time.”
She continued: “As the last two years have shown us, our financial situations can change very quickly, and it is important to have enough savings for a rainy day. Cash savings should be used for things we want in the near future such as holidays, a new car, or any unexpected emergencies such as a new boiler.
“Investing, on the other hand, should be considered as a way of saving for your longer term goals – things that are at least five years away. Over long periods, stock markets generally outperform cash savings so you are more likely to get better returns.”
It is important for savers to note that every investment has capital at risk and no outcome is guaranteed.
Savers are also advised to do their due diligence on their investing options as well as their current financial situation as the general rule is to not invest more than one could afford to lose.
Ms Francis advised those that do decide on investing to “try to avoid letting your emotions get in the way”.
This is vital advice both for deciding where to initially invest one’s money and throughout the time where the money is invested.
She said: “Seeing stock markets fall can be scary when you have invested in them, but try not to make any impulsive decisions. Remember you are in it for the long run and you need to give your money time to grow.”
Ms Francis added that thoroughly researching an array of companies, assets and investments is necessary for first-time investors: “Many people start out by investing in the shares of one or two companies they have heard about from news headlines, or brands they like, but this is actually a high risk approach to take. The saying ‘don’t put your eggs in one basket’ is very apt when it comes to investing.”
This idea is known as diversification, sharing one’s investment money out amongst an array of asset types, companies or investment models in order to offset any downturns that may tank a singular industry.
While it may seem like a never-ending research rabbit hole, Ms Francis suggested ready-made investments for beginners.
She elaborated: “Lots of providers offer them and at Barclays we have five ready-made investment funds to choose from. They each invest in shares and bonds of companies from all over the world but the level of risk they take varies.
“Some people are more comfortable with a low risk approach, others are happy to take greater risks for potentially higher returns, so you just need to work out which level of risk you’re comfortable with.”
For long-term investments, the best selling point for some is the ideal that they don’t have to do much once their money has been invested.
The biggest decisions around investing are generally made at the very start. This includes where to invest, how much, how often and how long to leave the money in for.
Ms Francis suggested that once savers have completed these steps they “try not to think about it very much”.
It’s easy to become overwhelmed or nervous when watching one’s money sitting in an investment, especially if there is turbulence in the markets, although this isn’t to say savers should forget about their money entirely.
Ms Francis said: “Try and check on your investments just a couple of times a year. It is important not to ignore them completely as you want to make sure you are on track. Also, your goals or circumstances may change over time, as might the amount you can afford to invest, so you might want to make some alterations.
“Over time, if you have more money to invest, consider spreading it further and investing in a number of different funds as this additional diversification will help manage the overall risk you are taking.”
Ms Francis also reminded savers that an ISA could provide the ideal tax-free wrapping for their starting investments: “It is also worth using your annual ISA allowance. You can invest up to £20,000 this tax year, which ends on April 5.
“You will then have a new £20,000 ISA allowance when the 2022/23 tax year starts on April 6. Any returns you make on money in an ISA are tax-free, whereas if you invest outside of an ISA you might have to pay dividend tax and capital gains tax.”