How To Invest Your Money – How Much, Where And How
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Months earlier I had to borrow money to buy food and pay rent, now I was sitting here with a tan and £6.5k in my current account. But what was I supposed to do with all this?
I’d just returned from a year’s internship working in France. Alongside careful budgeting through the year, I’d received the final tranche of a grant (promised at the start of the internship) on my arrival home.
I knew I should invest but just didn’t know where to start. I started Googling for help but the more I looked the more confused I became. Property? Stocks and shares? Forex bots?
In the end, I felt so overwhelmed I decided the best action was to look into it another time.
Over the following 12 months, the money slowly dwindled on a cocktail of partying, clothes a month travelling and living expenses. It turned out ‘looking into it another time’ was a decision after all.
Since we were not taught money management or investing in school, it’s difficult to know what to do with our money. After a lot of trial, error and a huge amount of reading (and asking questions) I’m now a lot more confident on how to manage my money.
Here’s how I would recommend managing your finances:
Start with an emergency fund – The only thing we can expect is the unexpected.
Calculate an average month’s expenses, now depending on your risk tolerance multiply this from 3 to 12 months.
This acts as a cushion available if unforeseen circumstances hit such as unemployment or ill health.
Build this before investing so if bad times hit, you’re not forced to pull out investments at catastrophic times (bottom of markets).
Keep this in cash in a readily available separate account. I personally use Santander’s current account (3% interest – tax-free up to the first £1,000 in interest).
Maximise ‘free money’ from your employer
With the introduction of auto-enrolment, all employers now have to offer a pension (currently being staged in – up to 2018)
I maximise this by investing up to my employer’s maximum contribution (e.g. if they match up to 4% I put in 4%).
Once you’ve got this far (further than most people!) you’ll then want to:
Consider the time and energy you want to spend
Investing in Startups, Property or Spread betting/CFD trading can offer meteoric returns but these should all be treated as a business since they require self-education, economic awareness, on-going time, accountancy & solicitor fees and large amounts of admin work.
If you’re prepared to put in the work, I strongly recommend you take this route.
Yet, if like most you don’t want to spend the time to develop this skill. An automatic investment every month into a mixture of world equities and precious metals would be the recommended route.
Start with an online broker
If you choose this method, you’ll need start by signing up with an online broker (who you buy the investments through).
Note: Broker fees vary with some so high they make it near impossible to make a positive return once you’ve paid their fee (and that’s before the fund fee). Thankfully with the internet, we now have many low-cost providers.
So, who do I choose?
If you’re going to be investing a lump sum Hargreaves and Lansdown would make a good fit. If you invest every month (the recommended approach to benefit from pound cost averaging) I suggest Cavendish Online (a wing of Fidelity with the lowest fee’s I can find). Ensure you wrap your investment in an ISA (available on both platforms once signed up).
Okay, so what do I invest in?
A combination of world equities (stocks and shares) and precious metals (which tend to hold or increase in value when equities drop).
Whilst it doesn’t promise uber returns it can offer a steady year on year return, the fee’s on the funds are also very competitive.
Since every reader of this blog has a different situation (investable amount, different retirement age and goals) and FCA regulations I can’t recommend an exact portfolio (even if I could it maybe applicable to one but not another).
As an exercise (not intended as a real-world solution) here’s an example portfolio – based on a £100 investment:
- £10 Cash
- £30 Fundsmith
- £30 Scottish Mortgage Investment Trust PLC
- £30 Gold
What are you waiting for?
Finally, before I close I must iterate the biggest favour anyone under 30 has is the extra time they have to compound their money.
If you invest £5,000 the day your child is born and achieve a 10% annual return. When your child reaches 55 (with no further investment added), guess how much they’d have sitting in that same account?
Nope – £945,000
Or on a more personal note, had I invested that £6.5k seven years ago (and achieved 10% per year) it would now have more than doubled to £12,666.66!
Fired up and ready to go? Let us know in the comments below…
Disclaimer: At the time of writing I hold investments in Gold, Fundsmith and Scottish Mortgage Investment Trust PLC.