Many people mistakenly assume that ‘investing’ is not for ordinary people and is only for the rich and sophisticated. But that’s an urban myth. Having money sitting in a bog-standard savings account can sometimes be bad for your savings, so it pays to take some risk to ensure that your money is working hard for you.
The dangers of inflation
If you’re building a nest egg for the first time, putting some money into a cash account is a good idea. A good rule of thumb is to have at least three months’ salary set aside for a rainy day (take a look at our video guide here), but some people even recommend six months or more.
While money in the bank won’t fall in value, if interest rates are lower than inflation then your money is worth less over time. For example, something that cost £500 a year ago will cost £510 today, if inflation over the last year was 2%. But conversely, after 20 years of 2% inflation, your £500 will be worth just £337 in real terms.
You can offset the impact of inflation on your savings by putting your cash in a fixed term or notice savings accounts which typically have higher interest rates. But if you’re happy to set money aside for the longer term, it’s worth considering taking some risk and investing in the stock market.
By investing in the stock market, you could give yourself a better chance of growing your money over the long term. Companies exist to make money for their shareholders, and by investing in the stock market you’re becoming a shareholder. You’re entitled to a share of any profits a company pays out as dividends, and you could see the value of your shares rise too.
To risk or not to risk…
Of course, it’s not a one-way street – companies don’t always succeed and shareholders can lose money. That’s why it’s a good idea to hold shares in a number of different companies, to avoid having all your eggs in one basket. One of the best ways to do that is to place your money in investment funds which invest your and other investors’ money across a range of companies.
It’s also why we always say investing is for the long term. It’s hard to predict the stock market’s rises and falls in the short term – and if you’re likely to need the money in the next five years, cash is usually your best option.
If you do decide that you’re ready to take your first investing steps, check out our list of DIY platforms and our fee calculator to find the right home for your investments. As well as the cost of the platforms, think about how much help you might need, whether you want access to research tools and resources as well as shortlists and ready-made portfolios for you to pick from. Take a look at our list of example investors to see how platform choices varied from investor to investor.
We’ve got an array of guides to help you understand money and investments, find them here.