The challenge doesn’t stop there, of course. For those who have saved hard for years, or even decades, historically low interest rates on cash savings might seem to offer little reward.
Naturally, you want your savings to grow over time to be worth as much as possible. The combination of time and discipline could allow you to take a long-term approach to pursuing your financial goals.
To gain access to higher possible returns than banks can offer on your cash savings, you could consider investing in stocks and shares.
The value of investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.
Choosing the right approach
The pursuit of returns always involves accepting the chance of losing money. Some investment strategies involve greater risks than others, so you should first weigh up how much risk you’re willing to take.
Your approach to risk – and therefore the assets you might choose to invest in – may be informed by how long you’re looking to invest for. If your investment horizon is many years in the future, you might be able to ignore the short-term fluctuations of markets that drive the value of assets up or down from day to day.
It could be that you have a lump sum to invest, but timing the right moment to enter the market is notoriously tricky. Investing regularly reduces the danger of making a one-off investment at the top of the market before asset values fall (even if you might miss the chance to buy assets when they are cheapest).
Having decided how much you can afford to set aside for your future, a regime of regular investment – perhaps by monthly direct debit – switches the emphasis from timing the market to time in the market.
Making the most of your money
The earlier you commit to an investment strategy, the longer your money can work in the market. If you’re investing for the long term, there are ways to maximise the value of your investment pot.
1. If you choose to reinvest any investment gains you make, you can benefit from the effect of compounding. Reinvested gains can themselves generate extra returns, which, in a growing market, is larger the longer money is invested.
2. You can invest up to £20,000 a year through an Individual Savings Account, or ISA, which protects any investment gains you make from personal tax. It’s important to remember that the tax advantages of investing through an ISA will also depend on your personal circumstances, and that ISA tax rules may change in the future.
3. You should also pay attention to the costs of investing, as fees and charges reduce the net, or actual, returns that you’ll ultimately receive. It’s worth remembering that cheapest may not always be best, however – higher fees and charges might be worth paying if you receive better investment performance.
When you're deciding how to invest, it's important to remember that up to £85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, unlike stocks and shares or fixed interest investments which are less secure.
Please remember that the views expressed in this article should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.
The value of investments and the income from them will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.