What to do when you want your money to do more than just sit in a bank
Poor return on savings due to low interest rates mean Emily Davis wants to know how to make her savings work harder. NFU Mutual Chartered Financial Planner Andrew Miles outlines some options.
We all know we need to invest for the future, but many don’t know where to start.
Everybody should start by building themselves a financial cushion in cash. Ideally, you want the equivalent of at least three to six months’ income in an easy access savings account, which you can use in an emergency. However, once you have your safety net, you can potentially make your long-term savings work a lot harder.
If you’re setting money aside for five years or longer, the stock market has the potential to produce higher returns.
Why you should consider the stock market
When you buy shares in a company you become a part owner of that business. This means you may receive a share of future profits through regular dividend income and the potential for the value of the shares to rise. Because neither the income nor growth in the share price is guaranteed, investing in stocks and shares might seem risky, particularly for those with little knowledge or experience in this area.
Buying individual shares can be risky — few of us have the time, expertise or resources to buy a wide, diversified range of shares — and this is where investment funds can help.
Spreading the risk of your investments
Investment funds help reduce risk by pooling money from thousands of different investors, using it to buy dozens of different company shares. By holding a wider range of shares it can help reduce risk — if some companies struggle, this may be offset by other companies’ shares which may rise in value. Many funds are managed by professional fund managers who aim to deliver returns by carefully researching the companies they invest in.
You can spread your investments across a range of investment funds in different countries or sectors depending on how much risk you want to take.
NFU Mutual’s Fund Centre shows the range of funds we offer.
The power of regular investments
A worry for novice investors is that share prices may crash shortly after they pay in a large lump sum. One strategy to help combat this is to invest regular monthly amounts. If the market falls your monthly investment will buy more shares for your money; if it rises you’ll buy less, averaging out your investment overtime.
The key is to leave your money invested for year after year, even if the stock market goes through a bumpy period, rather than panic and sell up. It can be tough sometimes to keep your nerve in the face of volatility.
Don't pay more tax than you have to
You can also maximise your return by making sure you don’t pay more tax than you need to on any returns. You should be aware of the following:
- Dividend allowance — for those who invest in stocks and shares, the dividend allowance means you can earn £2,000 of annual dividend income before paying tax
ISA allowance —you can invest up to £20,000 in an ISA in the current tax year, in cash, shares or a combination of the two, with all returns free of UK Income Tax and Capital Gains Tax.
How NFU Mutual can help you
NFU Mutual Financial Advisers can help you better understand stock market investments and help you decide on the most appropriate investment for your needs. Find out more about our Financial Planning Service.