Beginning a savings plan can be a daunting prospect especially considering the plethora of investment options available nowadays. This guide aims to help the young investor get started. One thing to bear in mind as a young investor is that you don’t need to put in large sums of money, even a tenner a month will be sufficient at first, the key is to start early as we shall see why.
As a Gen-Z myself I understand the difficulty of getting started. I began investing 2 years ago trying to take advantage of the Covid-19 market crash. I went in headfirst onto the first trading platform I could find not unaware of some of the investing options available. Fortunately, I made a small profit but this was most certainly down to luck and not competence! After having devised a more forward thinking savings plan I’ve laid out some tips on how the young investor can get started.
Why start saving now?
Young investors have an abundance of time on their side, the most valuable financial asset. Often referred to as the 8th wonder of the world, compound interest and dividend reinvestment over decades can work miracles. Investing early puts you at a huge advantage as is illustrated below.
The green line represents person A who began saving £5000 annually from the age of 22, person B started at 32 with the same annual investments. The rate of return has been assumed to be 7 percent and both retire at 67.
Source: Vanguard
That £50,000 more the ‘early saver’ put aside now has £500k more in their retirement fund, that’s a whopping 10-fold return on investment! The question is, how much should you put aside each year? Financial experts recommend around 12-15% of your salary in order to secure a retirement whilst some suggest even more. Since you’re just starting out those figures probably seem laughable but bear in mind those are just guides and at the moment whatever you can afford will be better than nothing.
Before investing It may be wise to reserve some funds, around 6 month’s worth of living expenses as insurance for a potential job loss etc. A great place to place this may be in a cash ISA, it has easy access if needed and pays zero tax on any interest earned however, any risk-free account with unrestricted access will also be fine.
What are ISAs?
An ISA or individual savings account is a type of savings account that allows tax free interest and capital gains on money put inside them. There are four types of ISAs offered, the total allowance allows for £20,000 per year to be saved. This can be in one ISA or divided into as many as you wish.
A lifetime ISA (LISA) can be opened by anyone between 18 and 40. You can save a maximum of £4000 per year with the government adding a 25% cash bonus on top of that, up to £1000. The bonus is paid every tax year that you save something in your LISA until you reach 50, after which you can continue to earn interest but further payments are not possible. You can claim your cash bonus to contribute towards buying your first home or once you hit 60. If you decide to use LISA to help buy your first home, you can keep the account and continue saving for retirement.
A stocks and shares ISA allows you to invest without the burden of capital gains tax, so more money stays in your pocket. The returns will vary considerably on the provider and risk level you choose. To get an idea, the 21/22 tax year average was 6.92%.
Cash ISAs for the long term are not recommended for your savings as they only offer tax free interest of a percent or 2. However, as a place to store accessible cash they are great.
The final option is an innovative finance ISA, it is an investment opportunity that works by lending your money to borrowers in exchange for a set amount of interest. Generally speaking, they should be considered a relatively high-risk investment, just slightly more secure than stocks and shares.
Some of the highest ‘target returns’ advertise up to 10% interest though most are much lower than this. Target rates of 5 and 6% however, are not uncommon. The key phrase is ‘target returns’ – the provider will aim to achieve this level of interest, but it is by no means guaranteed. As a rule of thumb, the higher the target returns the more your capital is at risk. The ease of access you have to your funds will vary with the provider, usually you will be able to withdraw your funds so long as they are not currently being used although, there is sometimes a waiting period of 30-90 days.
How to invest in stocks and shares.
Personally investing your money can be an exciting prospect, especially the dream of a day trading lifestyle. I’ll warn you now, the majority of those who invest in this manner end up losing their money. According to the stock platform Etoro a whopping 80% of day traders lose money with a median annual loss of -36.6%. Unless you know what you are doing it is not advised.
As a young investor your investments should be focused on growth orientated assets given the years you have ahead of you for compound interest to really take its toll. Index funds are a fantastic long term investment. An index fund is essentially a basket of stocks and shares, they usually don’t change much resulting in lower trading costs. Some of the most popular and best performing include the S&P 500 and FTSE100 both of which are composed of the top performing companies on the stock exchange. They offer a simple approach to diversification mitigating much of the risk associated with stocks.
Saving for retirement:
SIPP – Self invested personal pension:
A SIPP is a pension ‘wrapper’ that allows you to save and invest a pool of money for your retirement. It is not dissimilar to a standard personal pension, the main difference with a SIPP is the greater choice with investments. You will get a tax rebate based on the income tax you pay.
Workplace pension:
If you are currently in full time employment and earn more than £10,000 then you may qualify for a workplace pension. Your employer must enrol you if you are eligible, so you won’t miss out if you’re not aware of it. A certain percentage of your income must be paid into your pension as a legal minimum – with both you and your employer paying into it. You can opt out of a workplace scheme but it’s a good idea to pay into it if you can afford it as you’ll get tax relief and extra cash from your employer. Here’s a useful calculator to assist in how much you and your employer will be contributing.
https://www.moneyhelper.org.uk/en/pensions-and-retirement/auto-enrolment/use-our-workplace-pension-calculator
