Saving money is a habit you should etch into your system. But when you start to realize that earning money and stashing it in your piggy bank is not enough to get you closer to your financial goals, you’ll be looking into investments for beginners.
There are numerous financial instruments available in the UK that it can confuse first-timers. If you don’t know where to invest your savings, here are investments for beginners that are easy to understand.
- Regular savings account
A bank savings account is the simplest investment for beginners since you only need to deposit cash into your account and let it sit to earn interest. You can deposit and withdraw anytime you want as long as you maintain the required minimum balance. Access to your account is also available online for added convenience.
The Finance Bill 2016 has made investing for beginners easier as it allows tax-free interest earnings of up to £1,000 on monies deposited in bank accounts. Afterward, regular tax rates on earnings will take effect.
Even though earnings are taxed, you’ll still be compounding your money by just parking it in your account. It’s a no-brainer method to earn money in a UK investment.
- Individual Savings Account (ISA)
An ISA is an investment for beginners where the interest earned is tax-free. The catch is that there’s a limit to how much you can put into your ISA account every year. Currently, the allowance for the period 2019-2020 is £20,000.
There are 4 types of ISAs available to investors:
- Cash ISA
This is like your usual savings account best used for short-term investment. Banks usually offer two types of Cash ISA, namely easy-access (or flexible) and fixed-term accounts.
- Stocks and Shares ISA
This type of ISA enables you to invest in stocks and bonds without getting taxed for dividend income and capital gains. You can use your funds here to buy individual stocks or put it in another investment fund.
- Innovative Finance ISA (IFISA)
Funds you put here will be invested in peer-to-peer (P2P) lending. IFISAs have high-interest rates, making them a viable investment for beginners.
- Lifetime ISA
If you plan to save for retirement, a Lifetime ISA is one of the best UK investments for beginners. A 25% bonus is added to your contributions each month, up to a maximum of £1,000 per year.
This is a long-term commitment that can be used for limited purposes only. A 25% deduction is taken off the account when the money is withdrawn before its maturity or for other purposes. Valid reasons for not getting a deduction are when you’re buying your first home, you’re terminally ill, or if you’ve reached the retirement age of 60.
Of the £20,000 limit on ISA deposits, you can only put up to £4,000 in a Lifetime ISA annually until you’re 50 years old.
ISAs are very effective UK investments for beginners because of their flexibility, high-interest rates, and tax-free features. They’re available to adult residents of the country age 16 years and above.
- Government Bonds
Lending money to the government can be worth your while due to its good interest rate and virtually risk-free nature. UK government bonds, or gilts, usually have maturity dates ranging from 1 month to 50 years.
For instance, a 10-year gilt with a 5% annual interest means you’ll be lending a lump sum to the government for 10 years. When the bond matures, your money will be returned with the 5% annual interest computed from the time you bought the bond.
- Mutual Funds
A mutual fund is a financial instrument wherein investors pool their fund to be handled by a professional fund manager. The fund is invested in a mix of stocks, bonds, and other securities through the expertise of a fund manager.
So, if you want to benefit from the advantages of these financial instruments in one go, putting money into a mutual fund is one of the best investments for beginners.
There are more financial products available in the UK, but these are the simplest to understand for beginners. Requirements are quite simple to accomplish, making these financial instruments easily accessible to everyone.
Investment Tips for Beginners
Before choosing a UK Investment to put your money into, you must assess a few things first about yourself.
First, look at your current financial standing to determine how much you can put into an investment. Regular expenses and investment money aside, consider keeping a portion of your spare cash as an emergency fund. You can tap this reserved cash in case your investment fails to bear fruit.
Second, think about the invest timeframe you can commit to. Each investment vehicle has a different maturity period for attaining maximum profits.
Invest money that you won’t need for the meantime. This lets you maximize the advantages of long-term investment vehicles and prevent you from touching your savings out of boredom.
There are flexible investments for beginners that will allow you to withdraw your money anytime without incurring any penalty. Long-term investments like Lifetime ISAs, for instance, can be withdrawn only during certain circumstances, unless you’re willing to pay the extra charges.
Investing is different than gambling. You may have heard of cryptocurrencies giving massive returns in a short amount of time. What most people don’t know is the high risk involved in this kind of speculative investment. You can try this later once you understand how to manage your money and grow it through safer investment options.
For now, it’s best to stick with simple but sure methods for compounding your capital.
Investing for beginners is easy if you know why you’re doing it. The success of an investment will depend on factors like risk profile, spending behavior, capital, and ROI timeframe.
Whichever financial instrument you plan to invest into, it’s a must to study about it before committing any amount of money. Plenty of resource materials can be found online and they’re just waiting for you to discover them.