If you’re new to investing, the stock market can seem like a pretty scary place.
After all, you’ve probably heard all those warnings about how investments can fall as well as rise, and how you could get back less than you put in – doesn’t seem that tempting, does it?
But there are good reasons why it might be worth considering investing, as long as you’re comfortable accepting the risks involved.
For a start, if you invest over a long-term period, at least five years, but preferably longer, history shows that you’re likely to earn potentially better returns than if you stash your cash in a savings account, although there are no guarantees.
Here are some of the things you need to think about to help you decide whether saving or investing is right for you.
What are your savings goals?
Your first priority should be to think about what you’re saving for, and when you want to achieve your goal.
For example, if you’re saving towards education costs for your children, or for retirement to supplement your pension and you won’t need your money for five to 10 years or longer, then investing could be an option.
If you’re saving towards something you’ll need to pay for in the next couple of years, however, perhaps a wedding or a car, then investing is unlikely to be right for you.
That’s because stock markets are volatile and if they go down in this period, you may not have time for your investments to recover before you need your cash. That’s why I always recommend you try and keep three months’ salary in cash savings before you even think about investing.
What’s your attitude to risk?
Even if you’ve got several years before you’ll need your money, if you’re absolutely certain you don’t want to lose any of your savings, investing won’t be for you.
However, it could be worth thinking about if you’re happy to accept a higher level of risk in return for potentially higher rewards.
If you think you are comfortable accepting some risk, you’ll need to think carefully about whether you can afford your investment to go down, and by how much.
Investing will only be right for you if you think you’d be able to manage financially if you lost money.
How much do you have to save or invest?
Lots of people are put off investing because they assume it’s only for the very wealthy.
However, you can start investing in funds from as little as £1 a month, or you can pay in a larger lump sum if you prefer.
Drip-feeding your money into the stock market every month can have its advantages, as it means you buy more shares when markets are low and fewer when they are higher, helping smooth out volatility.
When thinking about how much you can afford to put away, remember that you should always keep some money readily available in case of any unexpected expenses.
It’s usually a good idea to have a savings pot equivalent to around three months’ income if possible, aside from any other savings or investments you might have.
Before making financial decisions always do research, or talk to a financial adviser. Views are those of our mentors and customers and do not constitute financial advice.