How Do I Invest Money Uk

If you've got spare money that you'd like to do something sensible with, knowing the best place to put it can be tricky. Should you save it, even though interest rates are low? Should you take a gamble and invest it? It all depends on your financial situation.

In this guide, we explain the different was you can invest your money and earn a return.

Saving vs. investing

Before researching what to do with savings, it's a good idea to know the difference between saving and investing.

Saving money is when you gradually put money aside over time. You might save for something you want to buy or do, like a holiday, a shopping spree or a deposit on a new home. Or you might just save so you have funds for a rainy day, such as if you need to repair your car or something in your home. Most people who save use a bank or building society to save into, and earn interest on their savings.

Investing money is when you buy things that you believe will increase in value over time. This might include buying property, stocks or shares in a business. The idea is that you eventually sell your investments and make a profit. It's a gamble and much riskier than saving money. You could make a lot more money if it goes well but, if it doesn't, you could make a loss. That's why you should never invest more than you can afford to lose.

What to do with your savings, UK wide

Savings give you freedom to do what you want, as well as financial security in case something unexpected happens.

Generally, it's a good idea to have at least three months' worth of livings expenses saved up. This should be in a savings account that you can access easily, so that if something happened that meant you couldn't work, you'd have three months' grace. You could still pay your mortgage or rent, buy food and so on. It's also an emergency fund for if something goes wrong in your home.

Saving up 10% of your wages each month is good practice, if you can.

But not everybody should save. If you have bigger priorities to focus on first, namely paying off debts, you should tend to these before you start saving. If you don't have debts to pay, then you should definitely be saving. If you think this might be a struggle, you could use a budget planner to see where you can cut costs.

Before you start saving or investing

Before you start squirreling money away or thinking about how to invest money, UK wide, it's important that you first clear any outstanding debt.

You're charged more interest on most credit cards and loans than the return you get from savings accounts or investments. So a good first step would be to use any surplus funds to focus on clearing any debt.

Here's what to do:

Start by listing all your outstanding debts
Work out which debt costs you the most
Pay off the debt with the highest interest charges first.

Check if there are any restrictions on whether you can repay each debt early, as you could face early repayment charges and these can be high.

Should you use your savings to pay off your debts?

Short, medium and long-term goals

You might base your decision of whether to save or invest on whether your goals are short-term, medium-term or long-term.

It's a good idea to think about your goals before you make decisions on whether to invest or save.

What to do with savings

Overpay your mortgage

If you've got surplus savings, it might be a good idea to check whether you could use them to reduce the balance on your mortgage. Doing this could save you hundreds or even thousands of pounds in interest.

Some mortgages charge a penalty for you to overpay, so check your mortgage documents or ask your mortgage provider. You might be able to pay off a certain amount without paying a penalty.

Some mortgages charge you a penalty if you pay off too much in a single year. This could be as much as 1% or even 2% of the balance, so make sure you check before you go ahead.

You should also compare how much interest you'll pay on your mortgage to the end of its term, against the penalty to make a large payment.

Should you overpay on your mortgage early?

Use your ISA allowance

If you haven't used your ISA allowance this tax year, and you're not sure what to do with savings you've got, you could open a cash or stocks and shares ISA.

The main benefit of an ISA is that you earn interest on your savings, without paying tax on the earnings. It's a great thing to do with your money. If you plan to save, it's a good idea to make an ISA your first port of call.

For the 2021/22 tax year, the annual ISA allowance is set at £20,000. So if you're wondering what to do with savings, UK residents can save quite a lot this way.

Here's more information on ISAs .

Stocks and shares ISA

Stocks and shares ISAs (also called investment ISAs) let you invest your money in a tax-efficient way. This is because your annual ISA allowance isn't taxed, unless you receive dividends on your investment .

If you're wondering what to do with savings, you could look into this. You can compare more stocks and shares ISAs here .

Or, find out more about how stocks and shares ISAs work .

Choosing a savings account

Once you've decided what to do with savings, you'll need to find a savings account . Find one that offers the highest interest rate while giving you the access you need to your money.

If you want to lock your money away for a set period, then a fixed rate bond or notice savings account could offer a better return.

Here's how to choose the right savings account .

What's the best way to invest money?

Build your retirement savings

Depending on your circumstances and existing financial plans for retirement, you could use your money to build a pension.

Many consider this the best way to invest money. Investing or saving into a pension has a number of tax benefits. Depending on your income, it could boost the value of your retirement fund by up to 50%.

Find out more about investing in a pension here .

How to invest money: Choosing an investment

Knowing the best way to invest money can be tricky. Investing isn't a good idea in the short-term. It's a long-term game. But if you're happy to tie your cash up for at least five years, you could explore your investment options.

Remember that investing means your money is likely to be exposed to some risk.

Even if you choose a low-risk investment, you'd need to be comfortable that your money could drop in value if your investments performed badly. The bigger your investment, the more money you stand to gain – but you also stand to lose more.

There are lots of different types of investments. These include:

Stocks and shares
Bonds
Funds
Property
Government bonds
Art
Vintage cars
Wine
Fledgling businesses
And many more.

Diversification is a way of splitting your money across a range of investments. It can be a good way to protect yourself in case things don't go in your favour. By diversifying, you'll make sure you don't have 'all your eggs in one basket'.

If you want to find out how to invest money, it might be a good idea to talk to a financial advisor. Professional advice can help you make educated decisions, especially if you're new to investing.

Here's how to find a financial advisor .

This investment option lets you set up your own portfolio of shares. Shares are just slices of ownership of a given company that are sold to raise capital.

Share dealing lets you buy and sell shares in publicly listed companies using a stocks and shares account. You deal in individual companies' stocks directly.

The idea is to buy shares when their price is low and sell them on when they are worth more. The company sets the initial price, but then it is affected day by day by other factors such as the company's performance and the economy.

But there are no guarantees. Although you have more control, it can also be a much riskier investment compared to grouped investment methods. So make sure you know what you are doing before you start.

Here's how to start investing in shares .

Asset investments

Investing in precious metals such as gold, platinum, or silver, or in antiques, art or fine wines is increasingly popular. But they're high-risk options.

The value of these types of investments can fluctuate quickly. This means you're at risk of seeing your assets soar and then fall in value in a short time period.

Investing in property

There can be a number of advantages to this. For example, you can rent a property out to earn an income or renovate properties and sell them on for a profit.

If you don't have the cash to buy a property outright, then you're likely to need a buy-to-let mortgage. This would add extra costs to your property venture.

Also remember that if you rent out the property, you're taking on the responsibilities and expenses of becoming a landlord. This could end up costing you more than you think .

Find out if you have what it takes to be a property developer .

Speak to an IFA

If you're unsure which option is the best choice for your circumstances, speak to an Independent Financial Advisor (IFA).

An IFA will look at your finances in detail. They'll recommend a selection of investment options that are well-suited to your goals and circumstances.