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James Pearson

Regular investments can mean a healthier piggy bank

Posted by on 07/11/2016

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Low interest rates plus inflation could make investing a better option

For diligent savers who want to contribute to their future financial security these are lean times. With interest rates now at a record low of 0.25% and following a long period of historically low rates, you would be forgiven for wondering if we will ever see a return to healthier returns on our savings.

Of course no-one can predict the future and there is always the possibility that interest rates will rise at some point but it has been eight long years since we last saw interest rates of 5% or above and there has been a downward trajectory since then.

Even the average interest rate on a one-year cash ISA is now below 1% meaning there are slim pickings from one of the most popular investment options.

And even if you are willing to sit tight in the hope that interest rates will soon pick up, any returns currently being made could well be wiped out by increasing inflation – this rose to 1% in September 2016.

Low interest rates at a time of rising inflation means the purchasing power of money held in savings accounts will erode over time.

So what are the alternatives?

Investing in stocks and shares could be a potential alternative but many people may be nervous of committing their hard-earned savings to stock market based investments – particularly given the recent political and economic upheaval. For example, there is a lot of uncertainty at the moment following the EU referendum result.

But for those who want better returns, dipping your toe into investing for the first time or increasing the amount you are investing needn’t be terrifying.

Stocks and shares based investments do go up and down on a daily basis and at times these movements can be extreme. As a consequence this can put people off from investing over fears they could lose their capital.

This is where I would advocate the benefits of regular investing as a method of building up a pot of money over time.

What is regular investing?

Setting aside a modest sum each month may be a convenient way to build up a nest egg for the future. It is easy to set up and is as straightforward as paying your gas or electricity on a monthly basis, with an amount you have agreed to invest directly debited from your bank account. Each month your money is used to buy units in an investment fund or funds.

I would say the difference between saving and investing is that saving is generally required for a short term event – perhaps for a wedding, a new car, or a cash reserve to provide a safety net should you be made redundant.

Regular investing should be seen as part of planning for the longer term, for example, to create a nest egg for retirement.

Mitigating the risk of stocks and shares

Regular investing can offer a major benefit in limiting the impact of volatility in the rise and falls of the stock market, and even at times making sharp falls work in your favour.

By opting to invest agreed amounts each month you are buying units in your investment fund at the current price – so when markets fall your monthly contributions buy more units and when they rise you get less, but the units already purchased will rise in value. Over the long term, stock markets tend to rise.

This approach removes the uncertainty of when the best time to invest is as it is notoriously difficult to ‘time the market’ and means you avoid the risk of investing all of your money just before a dip.

The sooner you start putting money into regular investments the sooner your money can begin accruing the benefits of compounding – when accumulated income is itself accruing more income.

Getting started

If you believe regular investing is suitable for you, NFU Mutual can help with a range of investment products that will allow you to invest from just £25 per month.

You will be able to access a range of options to suit your circumstances which are designed to provide the potential for better long-term returns than offered by fully depositing your cash in savings accounts.

Find out more by contacting your local NFU Mutual Agent who will put you in touch with a Financial Adviser. Alternatively, call us free on 0800 980 8226.

NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers.We’ll explain our services and charges.

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Important information

The value of investments and any income can fall and you may get back less than you invested