Are you scanning the best-buy savings tables to find the top rate for your 2023 cash Isa?
Can I make a suggestion? By all means carry on with your cash savings, though remember inflation is over ten per cent and if your savings rate is beneath that, your money is losing value in real terms.
But have you thought about investing? Not sure where to start? Not sure committing your hard-earned cash to a stock market that could go down as well as up is a wise move? At least the balance in your cash Isa goes up as the interest is paid in. It might not be exciting but it’s not a gamble, either.
I have news for you. You can do both. And you don’t even have to set aside £500 just to open an investment Isa account. You can do it with a quid. So I have a challenge for you, because every one of us could benefit from investing even just a little bit of our money for the long-term future.
Put a pound into a stocks and shares Isa every day for a year. It’s just one pound. If you can afford it, why not try it? It will take you all of five minutes to set up. Go on. Whether your money goes up or down in value, you’ll have started. And that is more valuable than your return in one year. In a decade, you’ll be glad you did.
What to do next
1. Choose a provider. We’ve made a list of those in the UK that let you start with £1 on page 16. They’re each a bit different but you can open a new investment Isa every tax year (though you can only save into one each year). If you pick one and decide it’s not for you, close it and choose another next year. By then, you’ll know what you want from your provider.
2. Make sure they offer a stocks and shares Isa, also called an investment Isa. Everyone in the UK over the age of 18 is allowed to save up to £20,000 tax-free each year starting on April 6. It means you don’t have to pay income tax on any dividends you earn and you don’t have to pay capital gains tax if you decide to sell a fund or share and you’ve made a profit.
3. Open your account with £1. Some providers will let you link your bank account to your Isa (this is 100 per cent safe and secure) and set up a rule that will pay your pound into your Isa once a day automatically. You can just forget about it until this time next year.
4. If there isn’t that option, you should be able to set up a standing order with your bank to pay £1 to your Isa account once a day. You can set up a standing order in a branch, by post, over the phone, online or in your mobile banking app. The latter two are quickest.
5. Choose your investments. if you’ve never invested before, this might sound rather daunting. How do you just choose some investments? What does it mean?
Here’s how to tackle it…
A. You don’t have to be perfect. You can choose what you want. There’s no right or wrong. It might go up, it might go down, it might go up again. It’s £1 a day.
B. If you want to invest in companies directly, choose something you like and know. Lots of new investors start with retail stocks such as Next or Marks & Spencer because it’s easy to see what their product is. It might be property, technology, gaming, mobile phone and broadband companies. You can get technical with your choices later on if you want to keep going and put in more than £1 a day.
C. Choose a few different investments. Try not to have more than one or two stocks in the same business. If you buy three housebuilders and the bottom falls out of the market, you’re more likely to lose money. If you buy one housebuilder, one company selling soup, toothpaste and baby wipes to countries worldwide and one company building off-shore wind farms, you’re diversifying your risk. If the wind stops blowing, people will still clean their teeth.
D. If you’re worried about choosing companies yourself, then don’t. There are thousands of people who spend all day every day researching companies, quizzing their directors, reading their accounts and they’re the experts. Funds have lots of researchers and one or two managers who decide which companies they reckon will do well for you. You have to pay a fee for that expertise, but it doesn’t have to be expensive.
E. Choosing a fund or funds might feel overwhelming – there’s more than 3,000. Don’t panic. It’s likely your provider will ask questions about you before you choose where to invest. Many then suggest a few funds that match your answers. It’s called a model portfolio.
F. Some providers design ready-made thematic portfolios. This translates as: you care about the environment? Here are some funds invested in companies that also care about the environment.
G. These model portfolios tend to come with a slightly higher fee. If you want cheap and no hassle with good diversification, pick a tracker fund. These buy companies that match an index. The fund tracks the performance of the index, you get a diversified set of investments at very low cost and pretty low risk. A year ago, the FTSE 100 was at about 7,345 points. Today it’s around 7,900. That means £100 invested a year ago is now worth around £107. If you’d put that £100 in a savings account with a two per cent rate, it would be worth £102 now.
6. Press go. Close your app.
7. Try not to check it too often. Once a month, or every three months. If a natural disaster, war or political ruckus happens it’s worth taking a look just to see what the markets did in response. Same if there’s a super-good thing that happens – like inflation finally goes down or energy bills go back to normal.
8. Do not sell your investments if there’s a wobble. I repeat: Do NOT sell your investments if there’s a wobble. It’s 99 per cent likely to be a wobble and that means it’s 99 per cent likely to get its balance back.
9. If you are tempted, just stop checking the app. Stop it.
10. It’s April 6, 2024. Now you can check the app. Look at your money’s performance over the past year. You invested £366 (it’s a leap year), what’s it worth now? If you are down, don’t be disheartened. You’re an investor. You have savings. You know at the end of it, you’ll be OK. Best of all? You are, I hope, more confident about managing your money. All that, for a pound.
A pound a day…
It might sound a bit pointless investing just £1 a day but it does add up over the long-term. And investing should be long-term; it’s not a get rich quick scheme.
Interactive Investor did some analysis for Metro based on investing £1 a day for 30 days each month into the Vanguard LifeStrategy 80% Equity Fund – a good balanced tracker with pretty reliable performance.
Since the start of this tax year you would have saved £330. At the end of
February that investment would be worth £337 with income reinvested.
Over the past five years, a pound a day for an average 30 days each month would have seen you deposit £1,770. By now, that would be worth £2,030.
If you had been able to deposit the full £1,770 on day one into the best five-year fixed-rate cash savings account in 2018, paying 1.5 per cent interest, your balance would be £1,796 today.
*Calculations are based on Morningstar data accurate to 28.02.23
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