If you’ve successfully reduced your debt and accumulated some savings for unforeseen expenses, maybe it’s time to consider investing. But what’s the best way to begin?
Often referred to as being “investment-curious,” you might find yourself intrigued by discussions of investment around you and think about exploring it yourself. Investment involves putting your money to work so that it can grow, which is more beneficial than letting it sit idle or merely accrue minimal interest. However, the world of investment can appear intimidating to novices due to complex terminology, extensive fine print, and a confusing array of options. So, how should you get started?
First off, you don’t need a fortune to begin investing. You can actually start with as little as £1. Nor do you need to be a financial guru, glued to the financial news or continuously monitoring market trends on your mobile. There are numerous straightforward, user-friendly products designed specifically for beginners—if you’re a Monzo bank user, you can start investing with just a few taps on their app.
Why do you want to invest?
Understanding your motivations for investing is crucial. Your objectives will shape your investment strategy and choices. Everyone’s goals are different; they could range from saving for a child’s education, aligning your finances with your life goals, or preparing for retirement. Maybe you have some spare money and are curious to see if you can increase its value.
Consider your investment time frame next. How long do you intend to keep your investment, and when will you need access to the funds? These considerations will depend on your objectives, as well as on the benefits of compounding—where your investments earn returns, and then those returns generate their own returns. Over time, this compounding effect can significantly amplify your investment, creating substantial growth upon prior gains. The longer your investment period, the greater the potential for this compounding effect.
If you’re investing for a child’s university education and they are currently five years old, you might be looking at an investment period of around 13 years. If you’re saving for a house deposit, perhaps you’ll plan for five years. The duration is essential because it influences the type of investments that will best suit your needs. Investments can fluctuate, and initially, they might even lose value, but if you have a longer timeframe, there’s a higher chance for recovery. It’s also wise to have sufficient savings set aside for emergencies before investing.
While investments can increase or decrease in value, historically, markets tend to grow over time. It’s all about letting your money work for you in the long haul.
According to Monzo’s finance experts in The Book of Money, a guide from the digital bank, “Investing is most effective as a long-term, consistent endeavor, so a good guideline is to invest funds that you won’t need immediately within the next five years. Investing money that you might need soon could force you to sell at an inopportune time, not allowing your investment to fully mature and grow.”
Investing carries risk – how much are you comfortable with?
This leads us to consider risk tolerance. Simply put, investments with higher risks could potentially yield higher returns but also pose greater losses. Your comfort level with risk, influenced by various factors including your investment timeframe, will dictate your strategy. If you’re looking at a long-term investment, temporary downturns might not be overly concerning. However, if you need to withdraw your investment sooner, these fluctuations could be problematic.
Your risk profile might also depend on your financial stability—if you can afford to lose some invested money, you might opt for higher-risk investments. Conversely, if you are risk-averse, lower-risk investments might be more suitable.
How to invest – the options and tools
Monzo offers several tools to facilitate your investment journey, many of which are accessible via intuitive actions on their banking app. By opening an investment account, you can enable regular contributions through Investment Pots using a Stocks and Shares ISA or a general investment account.
A Stocks and Shares ISA is a tax-efficient way for UK residents aged 18 and over to invest up to £20,000 yearly in various assets like stocks, funds, and bonds without paying tax on returns, interest, or dividends.
To begin investing, you might consider opening an investment account and opting for a Stocks and Shares ISA. Next, select the funds in which to invest. Monzo offers ready-made funds and exchange-traded funds (ETFs). Ready-made funds invest in a diverse array of assets across different regions and sectors and are managed based on your risk preference—cautious, balanced, or adventurous. ETFs, on the other hand, allow more specific investments in certain indexes, regions, or industries, like UK-listed companies, clean energy, or healthcare innovation.
Investing in funds means your money is spread across various investments, making it a more diversified and lower-risk option than investing in individual company shares. As noted in Monzo’s guidebook, spreading your investments is wise because if one investment underperforms, it’s likely to be offset by others that succeed.
The app also supports flexible contributions. You can start with minimal amounts, automate your contributions, or make ad hoc deposits. Automation helps establish good investment habits, often without you noticing small weekly amounts being set aside. Over time, these can grow into a significant sum.
To learn more about how Monzo can assist your investment efforts, visit monzo.com/investments
Monzo’s The Book of Money: How to feel good (or better) about your finances is published by Penguin
Disclaimer
The value of your investments can go up or down, and it is possible to get back less than you invested. Your tax situation is unique and tax rules may change. Monzo current account required to access Investments. Available to UK residents who are 18 or older, terms and conditions apply. This guide does not constitute financial advice.
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