The money expert urged people to learn about investing before major ISA changes happen next year
The ISA allowance changes coming into force next April should be prompting savers to learn more about other ways to grow their money as their cash allowances will be cut. BBC money expert Iona Bain broke down exactly how people can invest with as little as £50 and three signs that say you’re ready to start trying.
The money expert appeared on Morning Live on May 5 take the topic “back to basics” as the idea of investing can be “daunting” to a lot of savers that may have to start dealing with it next year.
She said: “If you want to grow your money, there are two main ways to do this: you can either save it or invest it.”
A savings account works by providing you a flat interest rate on the amount of savings you have in the account. It’s considered the ‘safer’ of the two options as there’s no risk of losing your money, but there is a slight risk.
If your interest rate isn’t higher than inflation, you are technically losing value in your money. For example, if you put £100 cash in your piggy bank 10 years ago and take it out today, during that time your interest rate was 0% while the UK inflation rate rose by around 3% each year.
So while you didn’t physically lose any cash, that £100 will buy you less items today than it would have 10 years ago because it lost value. To get the same value from that £100 in today’s economy you’d actually need £139 according to the Bank of England.
Investing on the other hand provides variable returns instead of flat interest rates. The risk is that these can go down just as much as they go up, but it could also surpass inflation and grow your money further than cash savings ever could.
Iona explained: “(Investing is) when you are putting your money into assets, which are things like shares and companies, property, bonds, and the hope is that the value of those will grow over time and therefore, so will your money.
“You can choose to invest in individual assets but what a lot of people do is put their money into funds, which are very useful investment tools. Because this is when you pool your money with other people, and it’s investing on your behalf across a range of Investments.
Iona revealed some people may be investing already without even realising it: “Essentially, if you’ve got a workplace pension, that’s an investment fund. It’s being invested on your behalf to hopefully, grow your money over your working life so that you can retire one day.”
From next April, ISA savers under the age of 65 will only be able to put £12,000 into cash ISAs each year, instead of the current £20,000 allowance. This is meant to encourage more people to invest instead of automatically choosing savings.
Iona continued: “Younger folks are being encouraged to think a little bit more about investing their money. For example, putting more of that iso allowance into a stocks and shares ISA instead of a cash ISA.”
Iona shared three key questions people should ask themselves to check if they’re ready to start investing:
- Do I have expensive debts that need to be paid off?
- Do I have an emergency savings fund with three months worth of outgoings?
- Can I afford to commit this money to an investment for at least five years?
She explained: “You need to prioritise clearing (debts) that because the interest rate you’re paying on those debts is higher than what you would earn on your Investments.
“Then you need to think about your emergency savings. The reason why that matters is, if you have an emergency, you need to grab that cash in a hurry, it needs to be there for you. If you invest that money instead that’s not so easy.
“Now, the reason why five years is an important time frame to think about here, is that the stock market is a bit like a roller coaster, it goes up and down, it’s got its highs and lows. If you’re invested for at least five years, you’re increasing your chances of being able to ride that roller coaster and get a return.”
The expert noted you also don’t need loads of money to start investing: “If you’re starting to invest now with £50 a month, five years from now, 10 years from now, that is hopefully going to build up into a tidy sum.
“The extreme case scenario here is that you could lose all your money, but you can absolutely reduce the risks of that by not putting all your eggs in one basket. If you just put all your money into one company and it doesn’t do well, stands to reason, that’s a very high risk thing to do.
“Whereas if you’re putting your money into a range of companies, ideally across a range of different sectors all over the world. Hopefully you will get a return in the long run and that’s called diversification.”
For those who are already investing but have been scared by recent global events, Iona advised: “Because we’re living in volatile times, it’s very tempting to suddenly sell out with Investments as soon as you see a scary headline, but really important not to do that. Keep calm and carry on.”
