It’s always a good idea to save money for a rainy day. However, it’s possible to save too much money, especially when interest rates are at rock-bottom levels, as they are today. As such, now could be a great time to start investing for the future. Doing so could help you dramatically increase the size of your financial nest egg over the long run.
With that in mind, here’s my three-step plan to start investing today
Start investing with an ISA
Opening a Stocks and Shares ISA account is a great place to start investing. The great thing about ISA accounts is that any income or capital gains earned on investments held inside these tax-efficient wrappers don’t attract additional tax liabilities. This could allow you to increase your nest egg faster over the long run, as you get to keep more of the money yourself.
Most online stock brokers offer a Stocks and Shares ISA account, and they’re just as easy to open and operate as regular dealing accounts.
The one big drawback of these accounts is an investor can only deposit £20,000 a year. However, if invested sensibly, this should be more than enough to hit £1m in the long run.
Regular investing
With a Stocks and Shares ISA account in place, the next step to start investing is to set up a regular investment plan. A regular investment plan is one of the best ways to invest in the market, in my opinion.
If you have a lump sum investment, buying stocks gradually on a monthly basis may make more sense than trying to dive in the market straight away. That’s because pound/cost averaging comes into play.
This means an investor buys more of a fund when the market falls, and less when the market rises. As it’s impossible to time the market over the long term, this strategy means you don’t even have to try and is a great way to start investing.
Buy the market
When using a regular investment plan, buying the whole market within an index tracker fund could be the best approach. Buying single stocks can be a time-consuming and expensive process.
Buying the market with an index tracker fund may not only be easier and cheaper, but it could lead to bigger returns over the long run.
For example, over the past 35 years, the FTSE 100 has returned around 7% per annum. To replicate this return, all an investor would need to do is buy an FTSE 100 index tracker fund with a monthly investment plan.
A monthly investment of £400 would be enough to build an ISA worth £1m within four decades. That’s why it could make a lot of sense to stop saving and start investing today.
Even a few extra years of investing could produce big returns over the long term, thanks to the power of compound interest.