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The first rule of Bronni’s Investing Club is that I’m not a financial adviser, the second rule of Bronni’s Investing Club is you can both lose AND gain money when you invest, there is risk involved.
Last year I made a new year’s resolution to start investing. And I did it! Along the way, I’ve learned a lot, too much for one blog post imo. I’m going to use all the new year, new me vibes to propel myself into starting this new series of investment themed articles.
I’m going to start, as you always should (unless you’re Greta Gerwig’s Little Women) at the beginning.
You’re already investing
Do you keep your money anywhere apart from in your purse or under the mattress? Then you’re probably already investing. The only difference is, you have no agency to decide where your money is being used, and you’re not getting all the profit back.
When you put your hard-earned cash into a current or savings account at your bank, building society or credit union, it doesn’t just sit there. Financial institutions are using your money to fund loans, overdrafts, credit cards and mortgages for other people or organisations, and charging interest for it. In the world of investing, when your money is used as part of a loan it’s called a bond. Some of your money could also be being lent to the government as part of a gilt. Read more about how banks make money on the Starling blog.
Getting bogged down in the jargon? I’m sorry! I’ve written this investing terms glossary to help you out.
Bonds and gilts aren’t just spies or female pigs, they’re known as some of the more reliable “sure bet” types of investment. If your bank is doing this on your behalf, the value of your money isn’t really going to go down (and you’re FSCS protected) but after the bank’s taken their cut, the interest rate you’re receiving isn’t going to beat inflation, either.
Why you should start investing for yourself
If you’re scared or unsure about starting to invest, read my blog post why women (including me) don’t invest. Despite the scary title, I think it busts some of the myths that investing is too confusing or just for people who are already very rich. Investing is how the 1% keep getting more wealthy, meanwhile, inflation means that the money normal working people are putting in their savings account is actually going down in real-world value. I.e the £10 you saved 10 years ago will now only buy you £7.63 worth of stuff. That’s 23% down. It really isn’t fair, but you can tip the scales by getting involved in investing.
Try out the Bank of England’s inflation calculator.
Where should I invest?
The type of account you open to do your investing with is known as a wrapper. We aren’t talking Doja Cat here. The wrapper you choose can mean you pay less tax on your payslip, you pay less tax on any interest earned, or you get a bonus from the government to go towards investing. Apart from the options I’ve listed below, you could open a general investment account and get zero tax benefits. However, as a beginner, I’d stick to your pension and a type of ISA. But you know, I’m not a financial adviser, do your research… but unless you love paying extra tax or something? You understand.
A pension is the easiest way to start investing
If you’re between 22 and state pension age, and you’re employed and earning more than £10k from one job, you should have been auto-enrolled into a workplace pension scheme. A workplace pension will usually get you the most money to invest with while requiring the least expenditure from you.
There are four component parts of your pension pot:
- Your contribution – what is taken out of your payslip.
- Your employer’s contribution – depending on the Ts & Cs of your contract this could be an amount to match what you put in or their own percentage. Find out the statutory minimum here.
- Tax relief – if you’re a basic rate (20%) taxpayer or don’t pay income tax, this is added into your pension for you. If you’re an additional rate (40%) taxpayer you might have to claim it back through self assessment. Read more about pension tax relief at Which?
- Interest – what you’ll earn from the value of your investments going up. As it’s reinvested you’ll keep benefitting from the power of compound interest.
Things are always easier for me to understand when I can see real life numbers. Here is what a month of workplace pension contributions looks like for me:
- My contribution – £116.66
- My employer’s contribution – £291.67
- Tax relief – £29.17
I pay in £116.66 but the total amount that gets added to my pension is £437.50. My employer has quite a generous pension match, but regardless, you won’t get a bonus even close to that outside of a pension.
But my pension doesn’t feel like investing?
Because having a workplace pension isn’t very hands-on, it sometimes doesn’t feel like real money. Don’t know where your existing pension money is being invested? Take a look. There should be a way to log in online and see an investment fact sheet for the details of the companies, countries and industries your pension has been invested in. It’s possible to change the way your pension is being invested, but I’ll save that for another time.
Want to talk about investments in a judgment-free zone? Join the Bronni’s Investing Club Facebook group.
It’s not as exciting as playing Wolf of Wall Street and choosing individual companies to invest in, but it’s also considerably less risky. You can’t access your pension fund before you turn 55, die or are seriously ill, which sounds bad, but is probably a good thing. The longer you leave your money invested in something, the less vulnerable it is to fluctuations in the market. Even though it’s always possible you can lose money when investing, it’s very unlikely you will if you invest for long enough.
A Lifetime ISA
If you are working towards buying a house or retirement, you can get a 25% government bonus for adding money to a LISA. I’ve written in much more depth about my Lifetime ISA experience here.
There are both stocks and shares and cash LISAs. If your house purchase (or retirement) is five or more years away, a stocks and shares Lifetime ISA could be the more lucrative option. There are quite a few rules for opening and getting the bonus from a LISA, so please refer to my main article on Lifetime ISAs and research, research, research.
For retirement, even though Martin Lewis doesn’t really agree with me, I think they’re a pretty fair option. The downside is that there’s no employer match. However, the upside is you won’t be taxed on the money you withdraw because it’s just a savings account and a type of ISA at that!
- Do you value being able to access your savings whenever you like?
- Are you going to save more than £20k a year?
- Want to pay tax on the interest your money earns?
If you answered yes, no, no to the questions above then a stocks and shares ISA is probably where you should start with investing.
Even though it would be quite a stupid idea, you can put your money into a S&S ISA and withdraw it straight away, it’s not like a pension or a LISA there’s no limits or penalties for taking your money out.
You can deposit a maximum of £20,000 across all of your types of ISA each financial year. You can only open or contribute to one of each type of ISA each financial year. The types of ISA are as follows:
- Cash ISA
- Stocks and Shares ISA
- Lifetime ISA
- Innovative Finance ISA (I barely understand this one)
There’s no tax to pay on the interest earned in any type of ISA.
All of these reasons make it quite an attractive investment wrapper for beginners, and they’re not wrong. Nobody needs the hassle of paying even more tax, and some of us have things we’re saving up for that we want to happen before we’re 55.
Cool? I hope this has explained a bit more about starting to invest and made it all seem a bit less terrifying.