Today is A level results day and students across the land have discovered how the next chapter of their life will unfold, whether that’s at university, the work place, or a gap year full of new experiences. It’s a day full of emotions when nerves can turn to joy and excitement, disappointment or just sheer relief you got the grades you needed.
I learned a lot at uni but looking back now, with a healthy dose of hindsight, I’ve learned a lot from the university of life too. Especially about money and investing, a subject scarcely covered in my formal education.
So, 28 years on from my own A level results day, what have I learned about money and if I could bump into my younger self at the school gate now, what would I tell him?
Here’s five tips that spring to mind:
This is probably the hardest of all five - getting started. There’s always a reason not to save but if you take a step back and look at your spending it’s amazing how easy it is to fritter your money away on non-essentials. They say “take care of the pennies and the pounds will take care of themselves” and it’s true. So review your spending, if technology is your thing there’s some great apps out there that will show exactly how your money is spent. Are you really getting your money’s worth from that gym membership? Do you really need that coffee and muffin before work?
You just need £50 per month to start saving in a tax-efficient ISA, so you don’t need a large lump sum to begin with. The key is to get started, ideally with that first pay cheque, so it becomes a discipline you’re used to and when pay rises come, try to increase the amount you save so it always feels affordable.
Another motto comes to mind “Never a borrower nor a lender be”. This is a hard one, as given a choice none of us like being in debt to someone else. And of course if you want to get on the property ladder or buy your first car, a loan or mortgage will be essential for the majority of us. But shop around. Loan and mortgage rates really do vary and when it comes to buying a property, the higher deposit you can put down the more favourable the mortgage rate.
Most importantly, interest rates are still at historic lows since the financial crisis. At some stage they will go up, so don’t borrow beyond your means. And remember while mortgage rates might be low, credit card rates are much higher, so always pay off the credit card each month otherwise the debt could snowball quite quickly thanks to the power of compounding.
Harness the power of compounding
Compounding can simply be described as earning interest on interest. This is great for savers, but bad for borrowers. So if you’re only paying back the minimum amount you need to on your credit card each month, the interest compounds every month and the debt becomes bigger.
However when it comes to saving or investing, you get the benefits of compounding passed on to you. You simply need to give it time to take effect, which is another good reason to start as early as you can, especially when starting a pension. Retirement may be the last thing on your mind, but saving for your retirement in your 20s and 30s, when time is on your side, can make a huge difference compared to someone starting later on in life.
Now for an investment tip, which is one I’ve learned the hard way - be diversified. Or “don’t put all your eggs in one basket”. Once you do get started with an ISA or a pension, you soon learn whether you’re a risk taker or not. Taking too much risk and investing in one asset you really believe in can have dire consequences if you get it wrong. Similarly not taking enough risk and investing in a very cautious way could mean over time your investments have not grown enough to beat the negative effects of inflation.
With stock market investing there’s no guarantees and even the experts get it wrong, so spreading your investment over a range of different assets like, shares, bonds and property, over a number of different regions and sectors is the best way to be diversified. That way the investments doing well will compensate for the ones doing not so well. The easiest way to get this diversification is through a fund. For fund ideas a good place to start is Fidelity’s Select 50 list of recommended funds or the Fidelity Select 50 Balanced Fund which, as its name suggests, provides a balance of different investments in the one fund.
Time not timing
Finally, when it comes to investing it’s time in the market that’s important, rather than trying to time the market. When the stock markets get volatile it’s easy to think you can sell to prevent further losses and buy back before the markets go up again. However in practice, this is extremely difficult. No one rings a bell at the top or the bottom of the market. Trying to time the market means you have to time two decisions perfectly - when to sell and when to re-buy again.
Just as market falls come unexpectedly, so do the sudden rises, so it makes sense just to stay invested to ride out the volatility. The most important lesson with investing is to make sure you can give that investment time to grow. If you know you’ll need the money in the short-term and can’t invest it for 3-5 years, it would be foolish to take on too much risk, as it could fall in value just before you need it.
Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment on ISAs and pensions depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.