You should invest your money to increase your wealth. Investing allows you to invest your money into vehicles that can offer you a high rate of return. You are missing possibilities to raise your financial worth if you do not invest. Of course, you must consider that investing has the potential to lose money, but if you invest correctly, you have a better chance of making money than if you never invest.
We invest to stay up with or surpass inflation in general. Inflation is a dangerous risk that is subtle and progressive. Leaving money in a bank account that pays little or no interest increases the danger of it losing value due to inflation in the future.
If the loss is 2.5 percent each year, money left in a bank after ten years will be worth 25% less than it was today — if it were an investment, you would be extremely disappointed.
Therefore, we always recommend thinking of money as:
- In a bank. Short term savings, for money which is needed either to spend or to have as an emergency fund for a 5-year period at most
- In stocks and shares ISAs or a general investment account. Medium term savings, for money which may be needed between 5 years and 20 years
- In pensions or life insurance bonds. Long term savings for over 20 years
Many advantages may be gained through financial investments, including increased financial freedom. Because cash savings lose value over time as inflation diminishes their purchasing power, investing can assist to preserve the value of your money as the cost-of-living rises.
Investing can level out the effects of weekly market ups and downs over time. In the short term, there’s something gratifying about studying assets and then taking the initial steps toward securing your financial future. However, because the major benefits of financial investing are likely to manifest over the medium to long term, it’s recommended to ensure that your current financial circumstances are in good form before you invest your money.
What kind of financial investment options are there?
The main types of financial investments are:
- Individual Savings Accounts (Stocks and Shares ISAs)
- General Investment Accounts (GIAs)
- Investment Bonds
The first thing to realise is that each of the above are just ‘wrappers’ that contain an underlying investment and have distinct restrictions. For any of the wrappers, the underlying investment may be the same ‘investment fund’ or ‘portfolio’ of investment funds. The sole distinction between the investments is that each ‘wrapper’ has its own set of regulations.
A pension wrapper permits a £40,000 yearly contribution; the government adds 25% as tax relief when you make a contribution; it grows tax-free; it can only be accessed from age 55; and when you take money out, 25% is tax-free and 75% is taxable.
An ISA wrapper permits a £20,000 yearly contribution, no tax relief is applied when you contribute, it grows tax-free, it may be accessed at any time, and there is no tax charged when you withdraw money.
A GIA wrapper lets you to contribute any amount, there is no tax reduction when you contribute, and growth may be subject to Income Tax and/or Capital Gains Tax. It is always available. You may pick between capital units and income units, depending on whether you desire to receive income or gains, so that tax can be handled to some extent when you withdraw money.
An Investment Bond wrapper allows you to make any amount of contribution; no tax relief is given when you contribute; there is no tax consequence for basic rate taxpayers, and only a 20% responsibility for higher rate taxpayers. Instead of capital gains tax, gains are taxed on your income. Income tax can be managed by ‘assignment’ to a basic rate taxpayer, it can be written into trust easily and used as an Inheritance tax planning vehicle allowing some greater control of assets, and it can be written into trust easily and used as an Inheritance tax planning vehicle allowing some greater control of assets.
It’s crucial to choose the correct wrapper first, based on your goals, and then the sort of underlying investment you want to have. You may have a mix of wrappers, each with the same underlying investment or a different underlying investment. If you need help choosing the correct investment type for you, contact an independent financial adviser, such as Veracity Financial Planning. A financial adviser will put together a strategy and offer you guidance on investments. The depth of the adviser’s knowledge will help you with a lot of tough decisions.
How can we review our financial investments?
It’s easy to misinterpret an investment return when viewed in isolation. For instance, we may have a return of 2% one year and 10% the next. It’s possible to overlook the +2% year and consider the +10% year to be a terrific year when seen in isolation. When you look at a benchmark over the same period, such as the FTSE 100, things appear different (which may not be a great benchmark but is the one which everyone sees on the news).
- The FTSE 100 may have lost (-12%) over the +2% year, indicating a +10% out-performance of your investment over the general market, which is quite excellent.
- The FTSE 100 may have gained by +22 percent over the +10 percent year, indicating a (-12 percent) under-performance of your investment relative to the general market, which in certain cases might be considered unsatisfactory.