A beginner’s guide to investing: how to get started

If you’ve managed to pay down your debts and build up some savings to handle emergencies, perhaps it’s time you considered investing? But where to start?

You could call it being “investment-curious”. You hear people talking about investing all the time and you keep meaning to look into it. You know investing means that your money is working for you and, more often than not, growing in value rather than sitting idle or earning a minimal rate of interest. But investing can seem daunting if you’re only just starting out. From difficult terminology and small print to a baffling variety of products, it can feel like a lot to take in. So, where do you begin?

For starters, you don’t need to be rich to start investing. In fact, you can start with £1. Nor do you need to be an expert who reads the finance pages every day or constantly tracks market movements on your phone. There are a variety of excellent, easy-to-use products aimed at first-time investors – and if you bank with Monzo you can start with a few taps on your app.

Why do you want to invest?

The first step is to think about why you are investing. This is because your investing goals will inform how you invest and what in. Goals will vary enormously from individual to individual. But examples might include: to save for a child’s education, to help your money grow with your ambitions, or to save for retirement. Or you might simply have a bit of extra cash and want to see if you can make it grow.

Next, think about your time horizon. How long do you plan to hold the investment for, and when do you plan to withdraw the money? This will be informed by your goals, as well as the long-term compounding effect of investments. Compounding means your investment earns returns, then those returns also start earning returns. Over time, this creates a “snowball effect” where growth builds on previous growth. The longer you leave your money invested, the more powerful this snowball effect can become.

If you’re investing for your child to go to university and your child is five, your time horizon might be 13 years. If you’re thinking about a house deposit, it might be five years. This is crucial because it has a bearing on the type of investment that will suit you. If you invest in something that dips sharply in the first instance, it probably won’t matter too much if your child is only seven and you can leave it invested long enough for things to recover. But it could delay your house purchase plans. That’s why it’s a good idea to ensure you have enough savings to cover essentials or an emergency first.

Investments can go up or down, so there’s a risk you’ll get back less than you put in, but markets you can invest in have generally risen over time. It’s about making your money work for you in the long term.

As Monzo’s finance experts write in The Book of Money, a guide book from the digital bank: “Investing works best when you treat it as a longer-term, steady practice, so a good rule of thumb is to invest money you won’t need urgently in the next five years. If you do invest money you think you’ll need soon, you might end up forced to sell at a bad time, without giving your investment time to mature and grow.”

Investing carries risk – how much are you comfortable with?

This brings us to risk profiles. This is the degree of risk you are comfortable taking on. Very simply, higher-risk investments tend to mean a potentially higher reward – but also potentially a much steeper downside. There are many factors that feed into the level of risk you may want to take. If you have a long timeline, then a few ups and downs are acceptable. So a longer-term investor might think: “I’m in this for 20 years. It doesn’t matter too much if year three is rocky.” But, if you have to be out by year four, this will be a real concern.

Other things will impact your risk profile. If you’re comfortable taking on more risk – and you can afford to lose some of the money you invest – you might decide to put a portion of your money into higher-risk investments. If you are more risk averse, it might make more sense for you to look at a lower-risk investment.

How to invest – the options and tools

Monzo has built a number of tools to help you start investing, most of which involve easy and intuitive taps on Monzo’s banking app. Once you open an investment account, you can turn on the regular investing option, which allows you to automate contributions through Investment Pots in the form of a Stocks and Shares ISA or general investment account.

A Stocks and Shares ISA is a tax-efficient investment account that allows UK residents over the age of 18 to put up to £20,000 a year into assets such as stocks, funds and bonds. The ISA acts as something called a “tax wrapper” and this means that any returns, interest or dividend you make on the investments inside it are tax-free.

So one way to start investing would be to open an investment account, and choose a Stocks and Shares ISA. Next, you need to select which funds to invest in.

Monzo offers two types of funds to invest in. The first type is a ready-made fund and the second type is an exchange-traded fund (ETF). Ready-made funds invest in a variety of assets spread across different regions and sectors, they are managed according to the level of risk you’re happy with: careful, balanced, or adventurous.

The ETFs available through Monzo invest in a particular index, region or industry, which gives you more control over what you’re investing in, for example, UK-listed companies only, clean energy, or healthcare innovation. Bear in mind that some funds will be riskier than others and their risk is categorised by a risk rating.

Investing in funds means your money ends up in a mix of different investments. Because the funds are made up of numerous assets, they are more diversified and lower-risk than buying shares in an individual company. As Monzo’s finance experts note in their guide book: “Investing your money in lots of different things is a good idea, so if one of them doesn’t do well, it’s more likely to be balanced out by the success of others.”

The app also allows you to build up your balance in a way that suits you. You put in as much or as little as you’re comfortable with – and you can start with as little as £1. You can also automate your contributions – for instance, you can set the app to automatically invest the interest earned on any savings with Monzo, or set up regular deposits to allow you to invest small amounts of money every month. Alternatively, you can add money on an ad hoc basis.

The key advantage of automation is that the app helps you to build good habits. Many people won’t notice putting away a few pounds a week. But they will notice in five or 10 years’ time if their investment has grown into a nice nest egg.

To find out more about how Monzo can help you invest, visit monzo.com/investments

Monzo’s The Book of Money: How to feel good (or better) about your finances is published by Penguin

Disclaimer
The value of your investments could go up or down and you could get back less than you put in. The taxes you pay depend on your circumstances and rules could change in the future. Monzo current account required to access Investments. UK residents, 18+, Ts&Cs apply. This guide does not constitute financial advice.