It’s preferable to start investing at a young age – the younger, the better. If you are fortunate, your parents or legal guardians might have decided to start investing on your behalf when you were a child. It’s a great way to start investing without even knowing it.
Suppose you are lucky to have parents who will gift you an investment portfolio at a young age. In that case, they should also give you the best beginner’s guide to investing by encouraging you as a child to follow the progress of the account or portfolio, thereby arousing your interest.
If you weren’t one of the lucky ones, it’s never too early to start, and you get the green light at the age of 18. However, investing for beginners in the UK may seem a little daunting at first. Not only is there a risk factor to consider, but how to start investing in UK products and where to start investing can seem difficult to fathom.
In this article, we not only discuss how to invest for beginners, but we offer the best investment tips for beginners. So, your young investor’s guide starts here.
Investing basics for beginners – Understanding compound interest.
The first thing to get your head around is what is compound interest and the power it holds. What do we mean by that? We are talking about compound interest. It is the type of interest that earns interest on itself.
The interest made in one year is added to the initial investment, and after that, it gets added to the ongoing annual total on which it makes more interest. There are several compound interest calculators to illustrate the process for better understanding.
As far as long-term investment options go, compound interest gives substantial growth. Opening an account that offers this type of interest is one of the top financial planning tips for young adults.
Another top tip on investing money for beginners is choosing long-term investments. We’ve just mentioned them in conjunction with compound interest, but it’s not only growth where investing in the long-term makes suitable investments for beginners. It also helps to reduce risk.
It’s all about the relationship between volatility and time. Basically, the longer the period over which your investment is extended, the more likely your investment can weather any downward market trends. The growth of long-term investments is much less risky than short-term investments.
How to start financial planning.
While investing money for beginners is highly desirable, it is not something you should rush into. Instead, it would be best if you first learned how to do your own financial planning.
People want to invest in the hope of achieving financial security, and personal financial planning for young adults is the key aim.
To get off on the right foot, young wannabe investors need to identify their short, medium, and long-term financial goals. If you fail to set these targets, you are likely to spend more than you should, which could mean you will come up short when money is needed.
Financial planning for students is important too, but even the most astute can’t predict everything that could impact their financial situation, as the recent COVID-19 epidemic aptly demonstrates. But at least thinking ahead forces you to contemplate what could happen and try to be ready as best you can. It doesn’t apply only to wannabe investors. It’s something that all investors should do as an ongoing process throughout life.
Considering the best long-term investments.
One of the most popular long-term savings options is ETFs. The initials ETF stand for “Exchange Traded Funds.”
An Exchange-Traded Fund is a pooled fund shared by several investors. They are designed to track a specific asset, commodity or index and can be bought and sold on a stock exchange in a similar way to regular stocks and shares. They can be structured to track single commodities or extensive, diverse collections of securities. ETFs require no active managing as they are passive investments.
ETFs are pre-restructured portfolios. Moneyfarms Portfolio 4 is an excellent example of such. It’s a great way of investing in stocks for beginners as it is a long-term investment, so less risky. It also contains a wide range of products in its portfolio which provides another guard against risk – that of diversity.
Of course, you want to keep as much of your hard-earned cash out of the taxman’s hands as possible, and this is something we’ll look at next.
Investing in stocks and share ISAs and legally paying less in tax.
The best way to invest money in the UK and legally avoid paying tax is to use a tax wrapper. Investment accounts like ISAs wrap themselves around the assets within, protecting them from some or all the taxes that the taxman would otherwise claim.
One of the best things to invest in at a young age is an Investment ISA, also known as a Stocks and Shares ISA. We talked about investing for beginners while they are still children, and two of the long-term savings options you can go for are Junior Cash ISAs and Junior Stocks and Shares ISAs.
Both types of Junior ISAs (JISAs) evolve into ordinary adult ISAs when the child reaches their eighteenth birthday.
We already discussed the poor interest rates that savings accounts offer, and Cash JISAs are not much better. However, the returns on Stocks and Shares JISAs are considerably better. According to Moneyfarm, simulated Investment ISAs saw an average return of 9.64% per annum over the past decade, as opposed to Cash ISAs, which only saw a return of 1.21%.
But the reason that Stocks and Shares ISAs are so popular is not just the significantly better returns, they tend to earn but also the fact that ISAs are tax wrappers. Under normal circumstances, you don’t have to declare them on tax returns, and they are not subject to income or capital gains tax.
Can mortgages and investments coexist?
Rather than investing unallocated cash, some people prefer to make additional payments to their mortgage accounts to lessen the outstanding balance and pay the mortgage off earlier.
Although a mortgage payment is undoubtedly an option, it may not be the best place to invest money in the UK because you don’t have access to the funds and you pay taxes. In other words, it might not be a good investment. There is also the fact that you can incur charges or fees for early settlement.
You may be better off allowing the mortgage to run its course as it is usually the cheapest form of loan you will ever get. However, if you do have any unallocated cash left over, you can put it into a Stocks and Shares ISA and reap the benefits of the higher interest rates they offer.
Investing in children.
Having already discussed the benefits of opening or paying into a Junior ISA for your children or grandchildren in terms of starting them on the road of investing for beginners, some people also see it as an obligation to help secure a child’s financial future. It is a moral responsibility and one that doesn’t eat into your own adult personal ISA allowance. But what about your financial future?
