Introduction to Investing Part One: Why, What, How…

Introduction to Investing Part One: Why, What, How…

Introduction to Investing Part One: Why, What, How…

 

Are you thinking about investing but not sure where to start? Don’t worry, this is the start of a new series that explains how it works, why you should consider it, and provides details about all the different types of investment vehicles. You’ll learn how to set achievable goals, understand the risks, and how to keep an eye on any investments you make. 

 

Let’s start right at the top: 

 

What is Investing?

In the simplest terms, investing is sending your money out into the world to a company, financial scheme, or another investment vehicle so that you might potentially receive more money back in the future. The most common investments are usually tied to an overall goal like pensions to fund your retirement, savings to buy a house, or saving for your children’s future. Investments typically don’t offer you fast returns. They are usually long-term, meaning you wouldn’t expect to get significant returns from your investment until many years have passed. In some cases, your money may be tied in for a set duration of say 5 to 10 years, maybe longer. 

 

The different types of investments you may come across:

 

  • Shares 
  • Property 
  • Bonds
  • Investment Funds 

 

We will go into more detail about what each of the investment types means, how they work and the benefits of each vehicle in part two of our series.

 

Which is best: saving cash or investing?

Saving regularly and as early as possible is great because of the wonder of compound interest, which is when you reinvest your initial investment plus the interest (or profit) you have received, rather than cashing out. Compound interest is one of the best ways to accumulate wealth, because your money grows much faster year on year even without the need for you to keep topping up your investment account. 

 

However, investing means you may generate a higher return on the pot, which with compound interest, grows larger, demonstrated in the graph below: 

As you can see, investing has the potential to deliver more significant returns than holding cash savings. But investing is not without its pitfalls. They all come with a level of risk that could see your initial investment lose money rather than make money. Opportunities with the largest risks can deliver you higher returns – but the potential for downside is bigger. 

 

Why do people invest?
  

Firstly, your savings are negatively affected by inflation. Inflation is the increase in price for goods and services over time. For example, a cup of coffee in 1970 may have cost £0.25, now in 2020 the same cup of coffee costs £2.20. Whilst the product stayed the same, the amount it costs has risen, meaning the value of your money has changed – £1 doesn’t stretch as far as it used to. Leaving your money in standard cash accounts at the moment means that it’ll be subject to  interest rates which may be lower than the current level of inflation (1%), meaning your saving pot is decreasing in value in real terms. You’ll find that your money won’t be accruing much interest, whilst the price of everyday items gets more expensive. 

 

Secondly, people are attracted to the possibility of having their money working for them; especially when the interest they are getting on their savings is currently so low. Increasing your wealth and getting healthier returns without having to work extra hours to achieve it is an attractive thought. Research has found that the longer you invest your money, the less likely you are to lose in the long run, and it’s been proven that investments over a ten year period make positive returns 99.4% of the time. In contrast, investments over one month only have a 63.9% chance of producing positive returns. Investing isn’t necessarily a difficult or overly complex thing to manage – in fact, if you have a workplace pension you’re already investing!

 

How much can I invest?

There is not a set amount that is better, or worse, for investing. However, if you are paying off debt (particularly high interest debt) or don’t have an instantly accessible emergency fund available (3-6 months+ of your monthly expenditure), it’s sensible to focus on these goals first before investing. The interest rates on debt may be much higher than the expected returns on investments, so it always makes sense to clear them first. 

 

After that, decide how much is needed for your own financial circumstances. Generally, the golden rule is to “not invest what you can’t afford to lose” and remember, whatever you invest may not be instantly accessible to you if you need it or could incur a penalty fee if taken out early.  

 

A good place to start is to use the 50/30/20 rule to work out how much money you have to save each month. This rule takes all the money you make in a month and splits it down to how you should spend/save it. It looks like:

  • 50% on essential bills and outgoings.
  • 30% on discretionary payments (lifestyle funds).
  • 20% on saving/investing.

If that sounds like too much for you right now, start small! By making minimal regular payments into the investment account, as long as you keep topping it up, you’ll soon have a good pot. There are also apps that let you ‘save the change’, rounding up anything you spend to the pound and investing it. So if you buy something that costs £2.50, you’ll automatically invest the other 50p. They’re designed to get you investing little and often, with money that you won’t miss.  Just check the minimum amounts required to invest each month, and make sure you’re comfortable with that. 

 

What returns can I expect?

Returns on your investments are often given as ‘expected’ because what you actually experience is dependent on many factors, including the type of investment you’ve made, the performance of the stock market, and the level of risk you took. In the past, the average return on long term investments for the FTSE 100 was around 7.4% p.a (10 year horizon, dividends reinvested, data to 2019). This is compared to just an average of c. 1.8% savings rate across the same period. Note, past returns are not indicative of future performance. 

However, the past decade has been a volatile time for markets and the wider economy and we’ve seen many highs and historic lows which has led to uncertainty in the stock markets. This graph shows the index highs and lows of the FTSE 100 (The 100 largest companies listed in the UK) over the past 20 years. As you can see, there have been some drastic drop off points (2003 and 2009). However with the possibility of Covid-19 causing a new recession, we could see more volatility in the market. 

Source: London Stock Exchange, index values shown. Note past returns are not indicative of future performance.

There are other risks to consider like the closure of funds which have underperformed. In this event, investors may not be guaranteed their investment back.

One way people try to reduce the risk of investing is by diversifying their portfolio. This means that they spread their money across many different types of investments to make the overall portfolio less risky,  and this is something that we’ll cover in detail later in the series. 

 

Getting started

In upcoming articles, we’ll be covering the basics to investing, but before you make any firm choices on where to put your money, be sure to get some guidance from an independent expert (you can connect with one who is matched to your financial needs on the Bippit app). You’ll want to discuss all the possibilities with your advisor and understand the pros and cons of different approaches while you set some long-term goals. 

 

You should also consider where you want to invest – it may make more sense based on your goals to put more money into your pension pot or use it to pay off your mortgage rather than a different type of investment vehicle. You may want to use tax-efficient savings accounts, which are often topped up with money from the government, such as using the maximum of your ISA’s and pension allowance.

 

Remember that the best returns are usually tied to long term plans so you’ll want to be sure that any decisions are best for your financial goals. Speak with your dedicated expert in the Bippit app to discuss the risks involved with investing your money. No investment is guaranteed high returns, but there are definitely less riskier options out there. You may also want to consider how your investments reflect your beliefs and values, such as sustainable and ethical funds, but we’ll cover more about this in the next part of the series. 

 

Check back next week where we’ll be continuing our investing for beginners guide. We will be talking about all the different areas of investing, from Sustainability funds to Bitcoin and everything in between!

Low Financial Literacy is harming your employees. Here’s how to fix it.

Low Financial Literacy is harming your employees. Here’s how to fix it.

Low Financial Literacy is harming your employees. Here’s how to fix it.

 

The past five years have seen an explosion of fintech businesses who set out to change how we use, manage, and invest our money, but this makes knowing which one is right for you incredibly difficult. When it comes to investment platforms, there is still a lot of confusion out there. Have you opened an investment account with an online app? Did you get any financial advice before you invested? Do you know if you made the right decision? Usually, the first port of call when new to investing is to turn to the most popular apps, but popularity doesn’t always mean they are the best for everyone’s financial circumstances.

 

There are Stocks and Shares ISA’s where you select the level of risk you’re willing to take, platforms that allow you to invest your money into property via crowdfunding, savings accounts that lock up your money for a fixed period, stock trading apps where you can buy shares in individual companies, and let’s not forget the world of cryptocurrencies like Bitcoin. Whilst it’s great that there’s a push to get more of us investing through easy to use platforms, doing so without the right knowledge can be risky. The differences in investment vechicles can be massively confusing, and your employees may not feel like there is anywhere they can go to get impartial financial guidance, but they’d be wrong! Let’s dive into how you can support your employees to increase their investment knowledge to improve their overall economic outlook for the future.

 

The effect on employees and work

A low level of financial literacy amongst your employees may be having a detrimental effect, not only to their financial wellness but also to your business itself. A survey produced by OECD ranks the UK bottom for adult financial literacy. Professor John Jerrim (IOE) of UCL adds that “results bring into question how many adults in England really have the skills to make complex financial decisions.” 

 

As we’ve discussed previously in our Money and Mental Health blog, low financial literacy can lead to increased stress, anxiety and other mental health issues. The effect of poor mental and financial health on your business can be numerous: absenteeism, presenteeism, a drop in productivity, and a strained working culture. If they lack financial knowledge, your employees are susceptible to risky products and services that pump money into fancy marketing campaigns but don’t deliver optimal results for their circumstances.  

 

 

Potential issues

Aside from impacting your employees’ mental health and your business output, low financial awareness makes it easy for people to make the wrong decisions. How reliably can you decide to invest in individual stocks vs a passive fund if you don’t know the differences between the two, or what they are in the first place? What about the fees associated with investing – transfers and fund managers, for example? Do your employees know how their pension works and what they should be checking? What about combining pension funds from previous employers? 

 

A common issue is that employees end up following the actions of someone else, but what works for others like friends and family, won’t necessarily be right for their circumstances. They could end up:

  • Making unnecessarily risky decisions.
  • Losing access to certain benefits and tax advantages.
  • Not prioritising the right issues at the right time.

 

Addressing the gender gap

When it comes to investing only ‘23% of female adults in the UK hold an investment product, compared with 35% of men.’ Academics have given a range of reasons for this, including a higher percentage of women saying they “lack confidence” when it comes to “complex money-issues like investing, understanding financial language and ensuring enough money for retirement.” (OECD). This might be able to explain why fewer women make investments in the first place, or why they typically make more conservative investments than their male counterparts. Statistically, this situation leaves women in a far more vulnerable position – especially when it comes to future investment gains and financial security compared to men. 

 

Stigma and confidential support

Your company culture makes an essential difference in how confident your employees are to seek help and ask for money-related support from their colleagues and the company. Having a safe space where employees can discuss in complete confidentiality their money concerns and receive tailored impartial advice will help to reduce the stigma people have when they are experiencing money stress. Companies that create an open environment that encourages people to speak freely about money and the related topics like investing, will often find that they have a higher uptake of employees actively using the financial wellness benefits provided to them. Plus, they’ll feel supported by the business in their efforts to get better with their money, especially when it comes to their long-term plans. Remember that when it comes to money – no question is a stupid question!

 

How you can help

Businesses who prioritise the financial education of their employees can benefit from a workforce that’s productive, engaged and focused. 

 

The good news is that you can help to increase your employees’ awareness and confidence by carefully choosing which financial wellness solution you include in your employee benefits package. 

 

Bippit is unique because we put financial education at the top of our agenda. We know that receiving confidential, personalised, and impartial financial guidance from experts is essential to increasing financial wellness, and combining that with financial resources which are tailored to the individual needs of each employee has a significant impact. 

The ability to ask a personal advisor any questions at any time means that your employees will always have the ability to make informed choices for their circumstance and know why it’s the best option for them.

Money and its impact on mental health

Money and its impact on mental health

Money and its impact on mental health

 

Up until recent years many employers have felt that their impact over their employees finances stretches only as far as paying them a salary. After that, it’s up to them to deal with their own financial concerns and wellbeing. 

 

It’s a common misconception, but the truth is the exact opposite. We all have a duty of care for our staff, which includes their physical health – having a clean and safe environment to work in, and their mental health – ensuring they’re not overworked and have access to support when needed. However, where businesses often fall short is recognising the need to provide financial support to their employees. 

 

Money’s role in mental health

The link between mental health and money has been made very clear in recent years. We know that 9.5 million people in the UK have mental health problems caused by their money worries. There are also more than 18 million who worry about their money on a daily basis, and a third of these say that they lose sleep over it. There’s a cycle of anxiety and stress that people with financial issues get caught in: Poor mental health increases money worries <> Money worries make mental health worse. 

On top of the usual financial concerns, we have all been living through unprecedented times recently when it comes to our financial security. There’s a great deal of uncertainty and anxiety about whether things will get back to normal, and what will happen if they don’t. Getting access to credit, mortgages, and other loans is also more difficult than ever, as banks have tightened their lending criteria, which has further complicated matters. 

 

People with debt problems are much more likely to have mental health issues – 46% of them, to be precise. However, recognising the signs of poor mental health in your employees and understanding the root causes is not always easy to do. Your employees may be dealing with a variety of issues in their personal lives which could be impacting their finances – and in turn causing their mental health to decline. Things like large debts, stretched commitments, lack of savings, rising childcare costs, anxieties about the property ladder, family changes, divorce, and partners losing their jobs. 

 

All of these are difficult issues to deal with, and will impact mental health, which in turn affects how well we cope at work and manage our responsibilities. Your employees may start to take more time off work if they are suffering in this way, and will be 7.6x less likely to finish daily tasks. It may even go the other way – employees working late and at weekends and not getting enough rest in their free time because they fear losing their job. 

 

Early intervention is often the best way to alleviate and stop spiralling mental health decline, particularly when it comes to managing their finances.

 

A mental health strategy isn’t enough

Although you may feel that your current mental health strategy and company benefits cover all aspects of wellness, if you don’t offer dedicated financial wellbeing support to your employees, you’ll be missing a key part of supporting good mental health. Financial support and in-work benefits will help your employees to increase their financial knowledge and receive practical guidance and tips on how to create a budget, manage investments and plan for their financial future. 

 

Good financial wellbeing strategies have been shown to have a positive impact on employees’ mental health, where they’re able to feel more in control of their money, resulting in a drop in money-related stress. 

 

The differences between mental health strategies and financial wellbeing strategies are easy to see when you separate them out:

 

Mental health strategies often cover:

  • Emotional counselling and talking therapies
  • Coping with workplace stress
  • Support with conditions like anxiety and insomnia
  • Relaxation techniques such as meditation and breathing exercises
  • Exercise advice 
  • Healthy living advice

 

Financial Wellbeing strategies help your employees with:

  • Debt counselling
  • Budgeting guidance and support
  • Coaching to achieve long-term goals
  • Financial education resources
  • Support to increase wealth and security
  • Guidance for protecting health and family

 

The impact on your company 

It’s certainly in the interest of your employees to promote financial wellbeing, but it’s also good for your business. Deloitte has estimated that

“one-sixth of UK workers are experiencing a mental health issue at any one time”

which costs UK businesses £42- 45 billion a year through lost days and reduced productivity. This is in part due to employees spending time thinking about their financial problems, and not being able to focus on their work. It’s estimated employees with money worries lose up to five productive hours each week because they are worrying about money.

 

For businesses that implement a financial wellbeing solution, the results can be dramatic. The most common reaction is to simply increase your employees salary to reduce money worries, but financial concerns affect everyone, regardless of their income bracket. 

 

Instead, by providing your employees with the resources and support they need to learn and manage their money, absenteeism and presenteeism rates can fall. There will also be an uplift in employee retention as well as attracting better talent, while a marked increase in productivity from employees is often typical.

 

One way you can support your employees to increase their financial wellbeing is to create a safe confidential space where talking about money at work doesn’t come with a lot of stigma. Providing 1:1 coaching can build trust between the employer and the employee, and they will feel supported in their efforts to improve their financial security.

 

How we can help

Bippit is here to give your employees access to a confidential and comprehensive support. Our financial wellbeing platform is easy to use, innovative in its design, and packed with expert financial knowledge. Through our service your employees can receive a financial  healthcheck, get matched with a dedicated expert who they will be able to ask questions to at a time that suits them best, create and manage their budget, set trackable money goals, and learn more about pensions, investing, and saving in our unique content library.