How to invest

Investing can help you to achieve your financial goals, but should be approached with planning and care to ensure you choose investments that are suited to your needs and circumstances. Here are some steps to take in order to invest effectively.

Before you invest: Get into good habits

Analyse your spending

Before you invest you should have a thorough understanding of your current financial situation, and analysing your spending is a key part of it.

If you’re earning more than you spend each month, and you are happy with how your spending is allocated, you may not need to take any action or make any changes. However, if your income is less than your spending, or you want to reallocate where you spend in order to increase your disposable income, you should try making a budget.

A budget isn’t just for those struggling to get by – it can provide a solid foundation for your financial plan.

An easy way to track your spending

Moneyhub brings together all your bank accounts, and shows you exactly where your money goes with smart categorisation.

Manage your borrowing

Make sure you’re on top of any debts before you start to invest. Consider paying off any unsecured borrowing, such as credit cards, store cards and personal loans before you start investing.

For longer term debts like your mortgage, make sure that you have a repayment plan in place. You could carry out your own "stress test" to make sure you could still make your repayments if your circumstances changed, or if interest rates rose. You can use MoneyHub to see how an increase in spending would affect your budget and long term planning.

Have an emergency fund

Having an emergency fund is important for everyone, especially investors. Investments are a long term commitment, requiring at least five to ten years. It is vital that you have an emergency fund in place to cover unexpected expenses during this time. Consider keeping a minimum of three to six months essential expenditure in easy to access cash savings accounts.

Protect what you already have

Having insurance to cover you financially in case things go wrong can help ensure that you won’t need emergency access to your investments. This could include:

Wills and Lasting Power of Attorney

It's essential to have an up to date will in place, so that your assets will be distributed according to your wishes when you die, and to protect your beneficiaries from potential legal complications.

Next steps: setting your financial goals

Whatever stage of life you're at, whether you’re about to have your first child, buy a house or retire, it helps to have clear financial goals. Assessing your current situation will help you to work out where you want to be, and how to get there.

Investing to achieve your goals

Once you have built a financial plan and timeline of your financial goals, you then need to choose investments that will help you to reach them. The specific investments that could work for you will depend on your needs and circumstances. However as a general rule, the sooner you will need access to the money, the less risk you should take. You can find out more about the risks associated with each type of investment by visiting our guide.

Investing tax-efficiently

You should make sure that you are not paying any more tax than you need to. There are two main ways to protect your investments from tax:

  • Investing through a Stocks and Shares ISA protects your investments from Income Tax and Capital Gains Tax, up to a set limit. For the 2016/17 tax year your total ISA allowance is £15,240.
  • Investing through a pension can provide a tax-efficient way to invest for retirement. In addition to tax-free growth, you also get tax relief on your contributions.

If you do choose to invest, you need to take into account investment risk as well as potential growth.

You might also want to speak to a financial adviser who can help you plan ahead to meet your goals. It is important to consider taking financial advice before making any major investment decisions, especially if you're investing for the first time.

Last updated: 05 April 2016