Is it Sensible to Invest Money?

Many people invest money for different reasons. It could be that they want to put their money away for the future, that they want to get an income from their money so they do not need to use loans, or they want to buy something that they hope will increase in value in the future. However, investments are risky and it is important to be aware of the benefits and risks before taking out any sort of investment.

What are the risks?

When you invest money, you buy something with your money that you hope to go up in value. This can be anything from a piece of art to a share of a company. However, whatever you buy, there is no guarantee that it will actually go up in value and some things are riskier than others. For example, if you decide to buy a house in a good area that you know well and rent it out knowing there are lots of people looking for rental property, then that could be less risky compared with buying a piece of expensive art from a new, young artist that may or may not become famous.

These are two extreme examples and there are many different types of investments that you can choose from and they all carry different levels of risk. Some people will use a financial advisor to help them to choose. If you tell them how much risk you are prepared to take, they will then advise accordingly. It is often the case that a higher risk investment will give a bigger return and a lower risk investment will give a lower one but this is not always the case. There are so many things that can influence the value of an investment that they can be quite unpredictable. Obviously, the higher risk investments, as well as giving the possibility of a higher return, will also give the possibility of you losing the money you have invested as well. This is because, if the value of the item you have bought goes down, you will not get back all of the money that you invested. Even if you do get it all back, there may be fees when you sell them or for managing your investments so that could also mean you do not make any money. If the value does go up, you will have to pay capital gains tax on the money that you make so that will reduce the return that you get as well.

In order to reduce the risk, investments should be made for a significant period of time. This is because their values tend to fluctuate and if you keep them for longer, the effects of those fluctuations should even out and this will mean that you will not be so likely to see a loss. However, a significant period of time would normally refer to a decade or more, which means that you need to make sure that the money they you invest, you can afford to tie up for a significant period of time.

What are the benefits?

After reading the above it may seem like there are not many benefits to investing. However, if you have a chunk of money or want to make a regular payment for a long time period so that you can use any gains that you make in the future then this can be a good way to do so. It could be something that people do to save up towards retirement, for example, or for their children so that they have money to buy a home when they are older.

The potential gains are much bigger than if you use a savings account and this can be much of the appeal for a lot of investors. They will hope that their money will gain in value a lot more compared to the small amount of gain they will get if they put it in a savings account.

If you are worried about the risk then using a managed fund could be for you. The fund manager will decide where the funds should be invested to make the biggest potential gains and if they are experienced then you should be able to trust them to make the right decision. There will be a charge for this though but you can compare the charges of the different companies as well as their potential gains (usually based on past performance) and then you will be able to decide whether you think they are a good company to go with. You still have to take a risk because you do not know whether past performance will be a good indicator of future performance but it is better than not doing any research at all and just making a risky guess. Hopefully you will make the right choice and will make some gains.

How Much Money Should You Have Saved up?

We are often told that we should save money so that we have some to help us out in emergencies. This can allow us to feel secure and know that if we need money really quickly, we will not have to get out a loan in order to pay for it. Although loans can be very helpful at times, they need to be carefully planned and may take a while to be approved. This means that having savings can work out much better. However, knowing how much to save can be tricky.

Pay off loans first?

It is wise to perhaps start by paying off your loans first. This is obviously not going to help you to save up some money in the short term but financially it could be wiser. This is because the loans can be more costly compared with the return you get on savings. Therefore, compare the rates and see how they add up. You might find that your loan interest is twice and much as you can get in interest on savings. It will of course depend on your loan rate as well as how much money you can get on your savings. The rate you can get will be higher if you tie the money up in something like a bond or are prepared to give notice before drawing out the money. So, it could be a good idea to compare these rates and work out whether it is best to repay your loan first. Once the loan is repaid you will be able to save that amount of money and you will be able to save up more quickly if you are not also making interest payments on a loan.

Enough to replace a few white goods?

Often we find that it is white goods that we have to find money to replace. This is because they can tend to break down suddenly and finding the money to replace them all at once can be very tricky. You might be able to get a finance deal with the retailer and repay them in instalments, but this will depend on where you get it from. This will also be an expensive way to buy something as you will be paying the interest on it. Therefore, if you have the money available to pay for it without having to borrow this could make a big difference to how much it costs you. We can often find that several white goods might need replacing together or in quick succession and therefore it could be a good idea to make sure that you have enough money for two. You should be able to calculate how much you will need to put by if you look online at the prices of the sort of items that you think you might need to replace.

Enough to cover a few bills?

If you are short of money then you will still need to pay certain bills. You will need to make loan and mortgage repayments, pay your rent and pay your utility bills. If you run short of money then you risk being cut off or evicted and so you it is wise to make sure that you have enough money to cover these things. How much this is will vary a lot so you will need to take note of how much you normally need to spend and this will allow you to be able to make a decision as to how much you think might be a sensible amount of money to put by.

Enough for a few months’ salary?

Some people might think that it is better to put away a few months’ salary. This is so that if you lost your job, you will be able to afford to continue to carry on as usual with regards to your spending. This will give you a bit of leeway while you look for something else. How much you decide to save will also depend on the stability of your job. This will vary depending on the work that you do. If you have a zero hours contract or do contract work or any type then you may not have guaranteed hours and it is possible that you will be able to be released from your job with no notice at all. If you are in this situation then you will need to put by more money compared with someone in a permanent job with a notice period that will have more time to find something new to move to.

It is also worth noting that for some people a month’s salary is a lot more than a month’s expenses. If you save a lot of money or buy a lot of things that you do not need, then you may not need to consider how many months’ salary you need to save but how many months expenses. You might want to be completely sure and save the whole salary but it could be that you would rather just save what you really need so that you do not have to save so much money each month.