I have mentioned in previous blog posts that it took me a long time to start investing. I found the whole idea of investing quite scary. There were multiple warnings about the fact that you could lose your money and that you could get out much less than you put in. Putting the money that you work hard for each month, potentially very much at risk.
Plus, all of the financial jargon around investing was also off putting, mainly because I just didn’t understand the language. As with anything new, there are subject specific words and investing is no different. Things such as funds, shares, equities, bonds, risk and many more. It all seemed so overwhelming!
But, there is a very valid reason why you should think about investing, as opposed to keeping your savings in cash.
One of the big benefits of investing is the potential for increasing your wealth, over time. Keeping your savings in cash over a long period of time will actually lose you money. This is because of inflation which means the value of cash over time decreases. By investing your money, there is the potential to see gains in the stock market over time, so your money would be better used.
According to research using data from the Bank of England, here are some facts about saving in cash:
- Savers’ cash deposits reached a record high of £1.32 trillion in 2017
- Yet interest income on UK cash savings fell to at least a 20 year low in 2017, down to just £4.6 billion
- If surplus cash were invested in UK equities instead, savers could have earned an additional £31.2 billion in income last year alone
- In 2007, interest income was seven times higher than in 2017, despite far lower savings balances
The fact that there is £1.32 trillion saved, yet this is being slowly eaten away as inflation outstrips the interest received on these savings, just shows how much cash is just sitting in low paying saving accounts. This means the amount that is saved isn’t actually worth as much as that. Purely because it is left as cash. The fact that savers could have earned an addition £31.2 billion in income last year, purely by investing as opposed to keeping their savings as cash is mind blowing – what a crazy amount of money to be missing out on.
Another bonus to investing is to receive some income via your investments. I have made no secret about enjoying investing and creating a passive income stream from the dividends received from my holdings. Dividends are paid on each unit or share you hold in an investment. So logically, the more shares or units you hold, the more you could receive in income. If you then use those dividends to buy more shares, it can become a self-fulfilling prophecy as the more shares you own the more dividends it’s possible to receive and the cycle continues. Investments can reduce or stop paying dividends altogether so there are no guarantees, but some have long track records and have increased the dividends they pay every year for over 50 years. Logging in to your investment accounts and seeing dividend payments, however small, is quite satisfying to me.
Janus Henderson have put together an educational website called Steps to Investing aimed at the beginner investor. It talks through what investing means, how to work out your risk strategy and looks at what your long-term goals are. All of this is done in a language that is simple to understand, unlike many financial articles.
The aim of the website is to help you in understanding investing and show you the benefits of investing in the stock market for the long term. It also clearly explains the risks of investing. As someone who is already doing this in the hopes of retiring early, I think that this website will really help people. The potential benefits, if you can leave your money alone for a long time (10+ years) can be staggering, especially when compared to leaving it in cash. You could miss out on thousands of pounds, as inflation eats away at your stash of cash.
Remember, when thinking about investing any of your money, you should make sure that you have an emergency fund in place, so that you have access to cash should you need it. The recommendation for an emergency fund is three months’ salary in cash. Once you’ve got this safely saved, then you should think about investing your cash.
You also need to remember that as an investor; past performance is not an indicator of future performance. This means that just because something has had a positive run, does not mean it will continue to do so. The nature of the stock market is to have ups and downs, but if you are investing for the long term, the risks tend to be lower than short term speculating. The value of an investment and the income from it can rise and fall, and you may not get back the full amount invested.
To help you take your first steps in the investing world, Steps to Investing are holding an event in London at 6.15pm on Wednesday 25 April. This is so first time investors are able to meet a variety of financial experts and investors, and the Steps to Investing team. You will also have the opportunity to listen to the experiences of new investors who have recently taken their first steps in the investment world, ask questions and learn more about the journey to making a first investment. If you are interested in attending this, there is more information here about the evening.
I think that the Steps to Investing website is really helpful in terms of making complicated information seem much more straightforward. Investing can seem like such a scary thing to jump into but this makes it much more accessible.
Remember though, investing is different from holding cash. With cash, if inflation is higher than interest rates, the value of cash decreases. With investing, values go up and down, so there is the possibility that an investment could be worth less than it cost.
Do you invest? If not, why not? I’d love to hear from you in the comments below!
This post is in collaboration with Steps to Investing which is provided by Janus Henderson Investors.
I started investing properly about 10 months ago, although I spent 12 months just reading about it first. You really hit the nail on the head about all the warnings investment websites saying “investments go down as well as up and you may get back less than you pay in”. This terrified me! I think my strategy is a little different to yours- I only have funds, although your dividend posts have made me think perhaps I should take the plunge with individual shares. I started off with just £250 in one fund with HL and watched it everyday for a month to see what happens. Now I’m aiming to fill my stocks and shared isa every year. More of us women should be learning about this and taking the plunge, the earlier we start the more likely our investing mistakes will even out with profits from being committed to the long game.
Do you receive any dividends from your funds? Investing definitely is better over the long term 🙂
I have six funds and indexes and one of them tanked catastrophically this year (Woodford equity) but lindsell train global equity this year has delivered growth and dividends, so am pleased with that. That one makes me feel like I’m investing in shares because it only has 22 stocks/shares in the fund. Another I’m watching is Shroder income maximiser, also seems to be a growth with income fund.
Goodness I didn’t realise you could lose money over time by just saving!! That is terrible!! Thank you, this is so useful!
Yep, inflation does that to cash over time. Glad you found this useful 🙂
I am definitely getting started this year I just need to take those first steps.
You can do it! Let me know if I can help 🙂
Henderson raise an interesting point above about “emergency funds” and it’s one I’ve been thinking about for a while now.
Does the emergency fund change as one’s position changes?
I can see a very valid argument when you first start investing that it’s best to have a cash fund for emergencies before jumping in head first, but does that position change over time.
For example as you start to build up significant investments does the need for an emergency fund diminish because you can leverage a short term income gap whilst funds are freed up from the investment side? Would the nature and liquidity of your investments alter this position, for example would you counter a lack of liquidity with a great cash reserve?
Of course once financial independence / retirement is reached would the concept of the emergency fund change again – perhaps to one of hedging against falling markets when you’d maybe want to reduce withdrawals on investments?
What’s your thoughts?
I think the need for an emergency fund does ebb and flow as your circs change. When just starting out it is essential, to stop you running the risk of incurring debt or cashing in newly bought stocks on a downward trend.
As you move through your financial life the need is less so. Your income could be more, you have more cushion in month to month income, credit cards can become your 1 month emergency fund.
As you reach FIRE/retirement then it can change again. You may well keep a 2-3 year cash buffer to offset the need to drawdown on your stocks/funds when the market is down. Thus your emergency fund is there.
Some FIRE bloggers have no emergency fund preferring to invest it all for the higher return. Not something I am comfortable with. Each to their own though.
I think we must be reading the same blogs ☺️☺️☺️
My concern is that most blogs are very US centric and the dynamics of the S&P is very different to the UK and European markets, assuming you predominantly invest locally to reduce currency exposure then what works for US bloggers isn’t always going to be spot on for other locales.
Funny, if I was to say the one mistake I made on my path to FIRE it would be that I held too much in cash for an emergency that never came – if it had come I could easily have used credit cards to leverage until I’d freed up investments.
Live and learn I guess 😂
That’s an interesting point about holding too much in cash – how much did you have saved for an emergency?
I think having access to money in case of an emergency is a good one. But as habits change and investments build, you could, in theory, sell them and get the money back fairly quickly.
About a month ago, I commented that I would definitely be setting up a stocks and shares ISA… but the new tax year has rolled around and I still haven’t done it! I’ve missed the chance to open one in the 2017/18 year, but I was struggling to get to grips with everything and didn’t want to rush a decision like this.
It’s frustrating to feel excluded from investing because of the language and terminology, and I’m determined to crack it. So I’ll take a look at the Steps to Investing site and (at same point in the near future) take the plunge and just do it – I have an emergency fund, so surely there’s nothing stopping me?!
There’s nothing stopping you! Perhaps the unknown. You can start with small amounts – £25 – and go slowly 🙂 let me know how you get on!
Great guide and interesting too. I’m not in a position to consider investing but it’s something I’d certainly research a good deal before going ahead with.
I started thinking about investing after a regular savings plan paid out over £30,000 for an cost of £12,000. So I started reading and now have an isa and sipp as well as my work pension. Aiming to pay the mortgage by 2020 and then change my life completely
Sounds like you’ve got a great plan in place!
We invest, through S&S ISAs but index trackers not individual stocks.
It took me a couple of years to make the jump into investing as I was clueless and concerned about that “past performance is not an indicator of future performance” line. However to reach FIRE within our timescale I knew I had to jump in.
I don’t look at our investments very often to reduce the fear factor.
Yes, I was really concerned about losing money. I shouldn’t check mine as often as I do; that would help the fear factor I’m sure!
How often do you check in on yours?
I would love to start investing in the future. Right now all our money seems to go straight back out again but once we have a savings pot or a little bit of spare cash it’s something I’ll be thinking about x
You can start from as little as £25 a month, so definitely consider it when you have some spare pennies!
Very useful post, I would love to get into investing however I’m not brave enough at the moment so any tips would be very helpful!
I think I might do a post series around this 🙂
So I’ve just taken the step and created a S&S ISA with HL. I’ve transferred an amount that was sat in a Savings account getting 0.01% and added it to a growth portfolio fund – we’ll see how it goes.
Fantastic! You’ll have to let me know how you get on 🙂
So if we started with £25 per month, what is a realistic expectation of payouts in year 1, 2 and 3?
I appreciate, this is a rough forecast – but any indication would be useful.
Thank you