Investment planning - the basics
Saving and investing is about balancing the risks you are comfortable with alongside the potential rewards. As a general rule, the higher the risk, the bigger the potential rewards - but also the potential losses.
Whatever your investment objectives for the long-term, it is wise to set aside short-term savings of at least three months take-home income to meet emergencies. This should be held where you can access your money easily.
Your investment goals and attitude to risk are personal and may change over time, particularly as you near retirement. You will probably find you need to review your approach to investing as time goes on.
The first step in saving and investing is to sort out some basic short-term savings. This might be what you set aside in a bank or building society for purchases you need to make at short notice, such as an unexpected bill, or a planned expense such as a holiday.
Banks and building societies are normally safe homes for your money where you can usually expect to get back the money you've saved £1 for £1. In return for that security, your money may not grow by much - and inflation could even reduce the value of your savings and any growth.
You can put up to £5,340 cash a year in an Individual Savings Account (ISA) in this tax year. You don't have to pay personal income tax or capital gains tax on any interest your cash savings earn in an ISA. Some National Savings & Investment products, such as Index-Linked Savings Certificates and Premium Bonds are tax free too.
If you have money that you can save for the longer term, say five to 10 years, you might want to think about investing it in different types of assets. An asset is something that you own like cash, a share in a company, or property for example. Here are some examples of different assets.
- Corporate and government bonds - these are 'loans' to the government or companies that pay you interest in return. Government bonds are also referred to as gilts.
- Investment bonds - these are products from life assurance companies which invest your money in other funds and assets to provide you with returns over the medium to long term - read more.
- Open-ended investment companies (OEICs) - these also invest your money in other funds and assets to provide a return - read more.
- Stocks and shares ISA - here your money may be invested in funds which invest across several assets including stocks and shares. This type of ISA also has tax benefits in that you don't pay any personal income tax or capital gains tax on any profit you may make - read more.
- National Savings & Investments - these are a range of savings and investments that are backed by the Treasury, which promises to guarantee your capital.
- Property - this may involve investing in residential properties or a holiday home to rent out.
- Shares - direct investment in individual companies. Here you take a stake in the company and if it does well you may get a dividend, which is a share in the profits. The value of your share may rise or fall depending on many things including how well the company has performed. Read more about investing in stocks and shares.
Don't put all your eggs in one basket
Putting your money into different types of assets means you are spreading your risk, because if one doesn't do so well, another may do better. This is called 'diversification'.
You can choose to spread your money across shares, bonds and property, for example. But if you don't have the expertise or huge sums to do this effectively, this can be a struggle.
Instead of the DIY approach, you may want to consider investing in funds where your money is pooled with that of other investors to create a fund. Your money in the fund may then be invested across different assets, or in a particular type of asset, or in other funds, depending on the fund itself.
You get the potential benefits of an investment professional looking after your money as well as being able to access some types of investment that may not otherwise be available to you had you chosen to invest directly.