Get Started Investing

The question of “how to get started investing” can be a daunting one and can be difficult to find a place to start. In this article we will go over the precise steps to point you in the right direction when starting your investment journey.

Investing does come with risks but following these beginning instructions will enable you to start your investment journey with as little risk to your personal finances as much as possible.

Create an emergency fund.

Life is about the balance between chaos and order. The order in our lives is that monthly pay check coming into our accounts. The chaos are those bills which are unexpected. This is just life and something we all have to deal with.

Creating an emergency fund is finding the balance between the two. We do not know when that next bill will hit our finances and for most this can be detrimental to our finances. Having a pot of cash on the side, typically between 3-6 months of expenses, we create a buffer and reduce the risk of financial hardness and in the future, the risk of having to sell investments at an undesirable time.

What’s an emergency fund​?

An emergency fund is a specific pot of money put aside for emergencies specifically. We all know that life has a funny thing to sometimes kick us while we are down. But we can combat this with an emergency fund.

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Don’t confuse an emergency fund with savings. An emergency fund should be used for unexpected life situations. Don’t use an emergency fund for a nice holiday, this is a reason why we have a budget, so we can save for the nice things.

Why it’s important​?

We never know what will happen in life, our car could break down, we could lose our job, maybe there is a leak in the house and we have to get a plumber out to fix the problem. These are the kind of situations can take us by surprise and sometimes these can be make or break.

Expenses=sheet

Reference article – Money advice service.

You may have life insurance, to cover you or your family in a time of illness., have house and content insurance in case your house becomes damaged or your house is broken into, car insurance in case you get into a crash and pet insurance just in case your pet becomes ill. An emergency fund is like an insurance to protect you and your finances from these surprise bills.

How much should I save​?

There is a general rule of thumb around emergency funds which is said to be between three and six months worth of expenses.

It is typically suggested that an emergency fund is between 3-6 months of expenses. This doesn’t mean you HAVE to do the same. The amount you wish to save comes down to your risk tolerance and you have to take into account the type of cashflow you have and receive. If you are risk adverse you may opt for an emergency fund for even a year.

The reason for such large emergency funds is not just because of surprise bills but, as many of us found over the last couple years, jobs are not guaranteed. Having 3 months expenses means you have a 3 month buffer to find another job.

Do not be naïve to think these things won’t happen to you. Reduce your risks, reduce the affect of these chaotic events.

 

Create a budget.

The boring world of budgets, when many of us talk about budgeting people hide away and try and dodge the responsibility of actually looking at their finances. For some the idea of a budget is scary and nerving. This could be for many reasons such as they already know they are living beyond their means or just the idea is scary.

If you haven’t created a budget before, you may find some skeletons in the closet like subscriptions which you are paying for but are not using. Budgeting is not such a bad word many of us associate with it. A budget has normally been thought as a way to scrimp and save, buying the bare minimum. The truth is this is far from it, to create a budget is to simply get the most from your money.

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Instead of cutting all expenses other than the necessary its to make sure you are not wasting your money on things not needed or did not remember/know about.

What is budgeting?

Budgeting is the process of creating a plan of how you will spend your money, this can be expenses such as household bills (rent, gas, electric etc) which are a must to other bills which can be described as a want like gym membership or even a ‘fun’ fund.

This spending plan is called a budget. Creating this budget or spending plan allows you to know in advance whether you will have enough money to do things you need to do, like pay for insurance or utilities or even have enough to go out for a meal. If you find yourself living beyond your means (spending more than you are earning) this means you can adjust your lifestyle.

Putting it simply, a budget is simply balancing your expenses to your income.

Budgeting

Why is it important?

Since creating a budget allows you to allocate your money to the right needs it can ensure that you will have enough to get by each month.

Having a budget can also help you with any debt you have or even just keeping you out of debt. A budget can allow you to plan for the future and reduce unwanted expenses if you have any.

Seeing where your money really goes each month or week can really open your eyes to the kind of lifestyle you are living. If you have any short or long term goals around savings, such as a car, house or a holiday, you can use your budget to create a savings plan that allows you to hit such goals.

You may find that there is a hobby you wish to partake in but find you never have enough money to do so. Once you create your budget you find that you are spending £5 a day on a coffee before work. You can then balance it out that you could cut down on your morning coffee and allocate that money towards the hobby you wish to do.

Allocating your money within your budget is how you can view to get more for your money.

Things to include in your budget

When creating a budget you need two main columns, Income and Expenses.

The income column is the easy one to fill out as most people have one job which pays a set monthly wage. Creating this column will allow adjustments and to add in additional income as some work two jobs or have unregular pay.

The expense column is the one which needs much more attention and can take a bit of time to collect all the data.

In this expense column you will look at all your direct debits and spending pattern to work out where each month your money gets spent.

I typically break these into sections which I shall show bellow.

This is a list of out goings and can be edited as wish, you may wish to compile the insurances together into one section or expand sections like the savings if you have multiple goals.

Budget sheet

Once filled out you will have a great understanding of where you really are in terms of your finances. Now with the information you can view if you wish to change your spending habits so you can invest/save more or put money towards more fun things which you wish to achieve in your life.

 

How to get started investing?

Now we have the formalities out the way we can get into the real question of how to get started investing. While the beginning steps we took of creating an emergency fund & budget do not seem related to starting your investment journey. They are in fact key to reducing your risk to both your future investments and your personal finances.

 

Set your goals.

Setting goals gives you a long term vision of what you want to achieve along side short term motivation. Once you know your end goal you can work it back, break it down, into smaller goals which seem more achievable in a short term period.

Creating these short term goal posts along the way to your end goal allows you to focus your acquisition of the specifics to reach your end goal. You can organise and allocate your time and resources best once broken down.

Having these smaller goal posts once you know your goal enables you to measure your progress, increases your short term motivation and help you beat procrastination.

What kind of financial goals can you set?

Financial goals can vary person to person. Your financial goal should reflect your personal goals of what you want to achieve in life. But here we are talking about financial goals in relation to starting to invest. Different goals give you, the investor, different time scales which can affect the types of accounts and investments you may use to achieve such goals.

Your financial goals may look something like:

  • Retiring with a healthy retirement fund – enough to give you a compatible retirement life.​
  • Retiring early from work allowing you to achieve other aspirations​
  • A mixture of extra income before retirement whilst building a retirement portfolio​
  • Saving/investing towards a house​
  • Investing for a child​

Remember these goals should be SMART goals and here are the elements:

SMART Goals

The bottom line.

Setting goals can be daunting, especially if you have just started investing. In reality these beginning goals should be large financial goals. Don’t stress about the small things as all the small things entails is creating realistic goals going off logically deduced financial numbers based on a budget. 

We will couple your budget along with your goal to create easy and realistic goal posts on a short term basis which will get you to your end goal.

 

Understanding your risk tolerance.

Risk tolerance, especially when first starting out can be overlooked or not respected enough. What we also have to keep in mind is each others risk tolerance, everyone is different. Risk tolerance is often associated with age, though this is only one of a hand full of determining factors of a risk tolerance.

In general those investors who are younger, and have a longer time horizon, often gravitate towards higher risk investments and take greater risk for a greater reward due to the amount of time left to recover from a financial set back. Those with short-term horizon tend to gravitate towards capital preservation, lower risk to lower reward.

Those investors who are conservative may go for safer, low risk investments which are associated with bonds, bond funds & ETFs. Compared against the aggressive investor who is more associated with equities, equity funds and ETFs.

This covers risk tolerance with stomaching the ups and downs of the market but we also have the risk tolerance of age. Younger investors can afford to make mistakes and don’t need to rely upon the capital as much compared to older investors who need the money for retirement.

When investing it is normally said that your goals should be a minimum of 5 years away. The reason for this is because there can be short term volatility in the market, meaning if investing for less than 5 years there is a higher chance of a market dip creating a potential paper loss.

Risk tolerance

The types of risk tolerance.

Investors are usually classified into three main categories based on how much risk one can take.

  1. Aggressive

Aggressive investors are used to seeing large upward and downward trends (volatility). They typically invest into assets such as equities, this is due to the higher amount of risk taken but can provide higher returns than the overall market, but in turn can also face huge losses when the market performs poorly.

Aggressive = Try to beat market by a large margin

  1. Moderate

Moderate take relative less risk than the aggressive investor. Typically take on some risk and set a percentage of losses they can handle. These kinds of investors have a mix of low risk (ETFs) and high risk (equities) as a balanced investment portfolio with a chance of beating the market to a small degree. These investors typically earn less than aggressive investors when the market performs well but does not potentially suffer the large losses when the market falls.

Moderate = Try to beat market by small margin while keeping risk low

  1. Conservative

The conservative investor takes the least risk in the market. They don’t indulge in the luxury of equity investments and opt for investments which perform as the total market. They priorities avoiding losses above making gains, capital preservation. Typically these investors opt for a portfolio which consists of Index ETFs to perform as the market and may opt for Bond ETFs to reduce the volatility of the portfolio.

Conservative = Perform the same as the market or for capital preservation.

Things to consider when understanding your risk tolerance.

Here are 5 points to consider about you as a person/investor which can determine what risk tolerances you take.

Risk toleranceNow lets break these down to understand them more.

  1. Willingness to stomach large market swings (high volatility)

– Mr Market is a fickle beast, where with one hand he can offer you stability (a stable market = low risk) but with the other can disrupt the market and create volatility (volatile market = high risk). The latest of these volatile moves Mr Market gave us investors was back in March 2020. The 9th of March 2020 is named Black Monday where the famous S&P500 index fell 7.6%. [1]

This move affected the index which many ETFs track, such as VUSA (UK) or VOO (US), these types of investments are considered to be a lower risk tolerance investment.

The 7.6% may seem a lot but lets take a look towards the investments called equities which are considered high risk (equities = individual stocks).

On the 9th of March oil prices dropped 22% with oil stocks following swiftly with the likes of Chevron and ExxonMobil, which fell about 15%, almost double the S&P500 index. [2]

With these examples it shows perfectly the different stomachs you need for such market swings.

* To note this is an example and such events rarely happen but this shows perfectly the difference between low and high risk investments (*ETFs Vs Equities).

  1. Age you are to age of goal (time horizon)

Age is a factor but remember its never to late to start! But why does age matter?

When starting young you typically have little capital behind you and low earnings but the upside is there is a long time horizon with a potentially unlimited amount of unrealised earnings.

Because you have a long time period of hopeful pay rises ahead the capital at the beginning is relatively small compared to the amount you can earn in the future. This means you can take higher risks with your money as there is a higher chance or earning more in the future.

On the flip side of this we have people with a shorter investing time horizon. This means most of the earning potential has been used with a short time period ahead to recover from financial setbacks/losses. This typically means those with shorter time horizons aim for capital preservation rather than risking it.

People who have short time horizons and like to risk big maybe looking for that get rich quick fix to life, which normally ends up in tears.

  1. Insurances (emergency fund or savings for short term goals)

Emergency funds are not there as a saving for something, its exactly what the name entails, its for emergencies. Emergencies are unknown random events, similar to why we have house insurance in case something goes wrong or you have car insurance in case you get into a crash.

The way i like to view emergency funds is a short term insurance. It ensures your portfolio protection against unknown financial events which, if not for having an emergency fund, would be detrimental to your investment portfolio as you would have to sell a portion, or all, to cover an emergency.

You also want to take into account short term savings goals, are you saving for a house deposit, maybe a new car? As said at the beginning, investments really should be held for at least 5 years.

  1. General risk tolerance (do you like taking risks or playing safe)

Risk tolerance doesn’t just come down to investing, in life we take risks all the time. Some people like to follow a set and known plan with little deviation, this is what i would consider low risk.

On the other hand you have those who like to explore the unknown, do random things and think of consequences later, these people have a higher risk tolerance to life. These kinds of risk tolerance doesn’t completely correlate to what types of investments you typically like but also the types of risks you’d take in your investing strategy.

Those who like structure in life may benefit from investing a set amount each month, from using their budget, into ETFs or a set portfolio. Compare this to those who like the unknown, they may steer towards growth investing into individual stocks, trying to catch the rise in price when it appears.

Both the risk taker (high risk) and those who like structure (low risk) both have plans to suit their psychology but vary hugely.

  1. Emotional attachment to money

Let me get this straight, in one way or another we are all money orientated. There are now two ways about it, if you are not money orientated, why do you go to work 5 days a week and not live in a commune where you don’t have a need for physical things? I’m glad we got that out the way.

We have varying degrees of emotion to money and this comes down to many aspects: High/low income, Childhood, Way we are brought up.

High income earners typically have more capital spare after bills, which means they can take higher risks. Low income earners have to think carefully about their money. £1000 to a high income earner could be a nice weekend away while low income it could be a months pay check.

Childhood you could have been brought up in a family which lived pay check to pay check this could manifest itself in many ways. Such as wanting to provide your family a good life or a life you wish you had as a child, almost to compensate.

This psychology comes with a deep emotional meaning and typically results in a low risk investor as you have a high emotional attachment to money. A childhood where you knew money was being spent and you got whatever you want, that it didn’t matter about money, you may have a lower emotional attachment to money which can allow you to take higher risks.

Both these ends of childhood affects the way we value money, our incomes affect the value of money. But these are not statements of facts. Remember someone with lots of money can have the same value or emotional attachment as someone with little money.

A person earning £200,000 and invests £20,000 is the same percentage of investments from income as someone earning £20,000 and investing £2,000. Both are investing 10% of their income.

boardgame with letter showing risk,l oss, profit

 

Find account type to suit your goal.

We have went over your goals and risk tolerance, now we understand this we will look at what type of accounts may suit your goal. We identified 5 potential goals which cover a variety of situations many of us will come across in our lives.

Each goal has a specific account which can help you to reach your goals, though just because these accounts are attributed towards certain goals does not mean you have to utilise them, they are simply options available.

Types of Goals.

we set goals such as the following:

  • Retiring with a healthy retirement fund – enough to give you a compatible retirement life.
  • Retiring early from work allowing you to achieve other aspirations
  • A mixture of extra income before retirement whilst building a retirement portfolio
  • Saving/investing towards a house
  • Investing for a child

Each one has a specific account you can utilize which normally give extra benefits but may also come with caveats.

Accounts available.

Now lets take a look at 5 of the specific account available for each of these specific goals.

Accounts available

Self Invested Personal Pension (SIPP)

– Retirement & Bridge To Retirement.

The SIPP is a brilliant pension scheme which works similar way to a standard pension, though these SIPPs typically give you a wider choice of investments which you can manage yourself. Though different SIPP providers will have differing ranges of investments available.

Contributions into a SIPP qualify for tax relief. This means any contributions are boosted by a payment from the government. For example:

Lump sum of £2,000 into your SIPP, you’ll get tax relief of £500 from the government, so the total of £2,500 is invested into the SIPP.

If you are a higher-rate (40%) tax payer, you can claim extra tax relief up to £500 through your self-assessment tax return and up to £625 if you are an additional-rate (45%) tax payer. If interested about tax relief check out this article: https://www.moneyhelper.org.uk/en/p…/tax-and-pensions/tax-relief-and-your-pension

You can have both a SIPP and work place pension, the SIPP could be viewed as a pension top up pot.

SIPPs have an access age of 55, going up to 57 in 2028, and come with early withdrawal fees. If you withdraw early you may end up with less money than you put in. Withdrawals before the age of 55 you could be left with a large tax bill of 55% of the amount withdrawn from the SIPP early.

Stocks and Shares ISA

– Early Retirement & Bridge To Retirement

The Stocks and Shares ISA is a fantastic account for long term investing with the benefit of it being a tax sheltered account. Being tax sheltered you do not pay any tax on capital gains or dividends but comes with a limit of £20,000 per year of capital available to put into such accounts.

*The £20,000 allowance covers all ISA accounts, example: £5,000 into cash ISA and £15,000 into S&S ISA hits your £20,000 limit.

There is no withdrawal penalties but also no government bonuses. With no withdrawal penalties or access age means that you can invest for the long term in the account and utilize it at an age you wish to retire early or help you go part time with work.

Its worth remembering that tax rules can change but the government usually announces these changes in advance.

The ISA allowance over the years have been increasing at a generous rate but there is no guarantee that it shall keep increasing.

ISA Allowance

Lifetime ISA (LISA)

– First House

The Lifetime ISA has two uses available, the first and main one being you can use it to save for your first house, the second being as a retirement account.

There are huge benefits to the LISA as not only do you get that 25% gov cash back but also its a ISA which protects your account from any future taxes on capital gains and dividend income. Though you have to be between 18 and 39 to open a LISA you can carry on putting money into the account after the age of 39 and can get the bonus every year till you hit the age of 50.

The max bonus you can get is £33,000 if you open the account at 18 and max it out every year until you hit 50.

Because the LISA is part of the ISA type of account, the £4,000 limit on the account counts towards the overall limit of £20,000 across the ISA family.

There are two types of LISA accounts, cash and Investments. If you are over 5 years off buying a house or aiming for retirement the Investment ISA is normally suggested where are if you are looking to buy a house in under the next 5 years you may want to consider a cash LISA.

If you are curious about a Lifetime ISA (LISA), check out our article “Who is eligible for a Lifetime ISA”.

 

Find a broker which suits you.

Finding the right broker which suits you can be a game changer. The type of account can be viewed as the vehicle you drive, the broker is the satnav.

It’s great to have an efficient vehicle to get you to your destination but if the satnav is dodgy then you maybe lead stray from your path. For example you may find some brokers charge a lot for transactions/trades, if you have a small sum to invest but regularly these fees will eat into your capital drastically and means you progress slowly towards your goal.

The opposite to this is if a broker makes it easy to make transactions/trades, your psychology may be to want to switch investments or fall ill to FOMO meaning over the long term you don’t create much long term gains or feel the compounding affect.

Now you have found the accounts you wish to use to get to your goals, or the multiple accounts for your multiple goals we can then whittle the list of brokers down to a select few.

The reason why we use this flow order of goals, account then brokers is to reduce wasted time. Just like picking investments, choosing accounts and brokers should be straight forward and precise. No point finding your favourite broker only to find out that they don’t offer the account you wish to use.

Brokers And Their Accounts

Here are a list of some of the most common brokers in the UK and their accounts.

GIA = General Invest Account – ISA = Individual Investment Account – LISA = Lifetime Individual Investment Account

JISA = Junior Investment Account – SIPP = Self Invested Personal Pension

UK Brokers

Here is a great resource to view the fee structures of investment platforms/brokers:

Best trading platforms and stock brokers – Monevator

We’ve compiled the definitive guide to the UK’s cheapest online brokers. Whether you’re investing in shares, funds, or ETFs, look here first!

monevator.com

Once you have whittled down the list of brokers applicable to your goal and account type, you can then compare the costs of using each broker.

When considering a broker which fits your account requirement, you will want to take into account:

  1. Investment/trade frequency​
  2. Investment/trade size​
  3. Types of investments – Funds, ETFs or individual stocks. Maybe all the above.​
  4. Account size​
  5. Premium features – May restrict your investment options.​

Remember not all brokers are made the same, upon research you will find that there are flat fee brokers, Percentage fee brokers and commission free brokers.

 

Commission Free Brokers

You will find there are a select few quoted to be commission free brokers where it is free to make trades, though called commission free brokers they still come with fees depending on what features you use from the broker.

Using commission free brokers is great when you are first starting off, building up a portfolio as most your money can go into investments rather than fees. What i have noticed that due to no commission that trade volumes are increased compared to platforms which charge fees.

Examples of commission free brokers are:

BrokerLink
Trading212Sign up here
FreetradeSign up here
Invest EngineSign up here
StakeSign up here
– Check out our Trading212 ISA vs Invest article

Percentage Fee Brokers

Percentage fee brokers are generally good for those with a small to medium account/investing size. This is mainly due to flat fee costs costing more on the medium account rather than a small set percentage.

Quoted from the Monevator article quoted above: “Anyone whose assets are likely to remain below £25,000 (ISA) or £100,000 (SIPP) for some time to come will typically be better off with a percentage-fee platform that charges £0 for fund dealing.”

BrokerLink
VanguardVanguard: Helping you reach your investing goals | Vanguard
AJ Bellhttps://www.ajbell.co.uk/
FidelityFidelity International | ISAs, Shares, Funds & Pensions (SIPPs)
Hargreaves LansdownBenefit from an award-winning investment service

Flat Fee Brokers

Flat fee brokers are typically better for the investor with a large portfolio. With percentage fee brokers with no cap can create eye watering amounts of fees for the large account. “Investors with larger portfolios – Look first at the flat-fee platform table if you’ve accumulated over £25,000 (ISA) or £100,000 (SIPP).” Using a flat fee broker also gives you a know yearly bill for the year which can help with investment accounting.

BrokerLink
Interactive Investorinteractive investor – the UK’s number one flat-fee investment platform
iWebHome
ShareDeal ActiveShareDeal active – Home

Protection

When looking for a broker to suit your goal, you want to make sure that your investments are held with a reputable broker with the correct insurance.

You will want to check that your broker is authorised by the Financial Conduct Authority (FCA). If they are authorised by the FCA then they may be covered by FSCS.

 

Hopefully by now you have gone through the stages of protecting your personal finances and have answered the question of “How to get started Investing?”.

If you have any further questions feel free to join the Sensible Investors Forum, where you are able to put questions out to the community and share ideas.
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