Four ways to set yourself up for a brighter future via saving and investing

The beginning of a new tax year is a great opportunity to take charge of your finances and watch your money grow. Here are four simple steps that can put you on the right track.

1. Determine your goals

Having goals for your investing helps to create a clear action plan and benchmarks for your growth. If someone wants to get into running, they may have a goal of a marathon and lay out specific checkpoints along the way to achieve it. This same psychology can help with investing.

By determining if your plan is to buy a new house, start a family, or even join the ranks of ISA millionaires, you can begin to set out your financial goals, and plan how much you will need to invest to reach them. This can also help you understand what type of account will be most beneficial to you.

For example, if you’re planning to buy your first home, but know it will exceed the £450,000 limit for buying a home through a Lifetime ISA, you may prefer to save for the deposit via a Stocks and Shares ISA where there are no penalty charges on withdrawals.

One thing we’ve learned from those who have saved up over £1,000,000 in their ISA is the importance of starting early to allow money to compound.

2. Should you save or invest?

Depending on your financial goals, saving or investing could be the appropriate strategy for you.

If you are trying to build up an emergency fund or have a goal you’re trying to achieve in the next three years, taking risks with your money may not be the right strategy. But for long-term plans, taking higher risks through investing could be for you.

It’s also important to consider the risks of holding in cash. Although you can earn interest from cash, returns can be eaten away by inflation which is an increase in the cost of living. For example, something that costs £100 today would have cost you, on average, £53.26 in 1999 according to Bank of England data.

Since the advent of the ISA in 1999, someone investing £1,000 in a cash ISA each year, at the start of the new tax year, would have accumulated an average £34,392 according to AJ Bell calculations. However, this trails inflation over that period, with the Cash ISA failing to keep up with rising prices. To keep up with inflation over that time the pot would need to have been almost £39,000 – meaning cash savers lost out to the tune of £4,600.

But what if you invest instead? Putting £1,000 into an ISA invested in the average IA global sector fund during that period would leave you with £83,603.

3. Choosing the right strategy

If you’ve chosen to invest, deciding how to invest can be the million-dollar question. There is no investing strategy that will guarantee returns.

Certain individuals have developed a variety of methods they believe is the best way to invest their money. A few of the most popular strategies include chasing high performance, splitting investments across different baskets, buying the market underdogs, investing with the herd, or being contrarian.

AJ Bell investigated these methods, and modelled how they would perform over one year and 10 years. In the end, there was good news for those who don’t feel prepared to pick individual stocks: an average global equity index tracker yielded a 225% return over 10 years, outpacing each of the investing methods. The second-best return came from performance chasers, at 154.7%.

Just remember that what did well in the past won’t necessarily do the same in the future.

4. Embracing dividends

Not all investments mean waiting years to enjoy the fruits of your labour. Many investments can generate income as you go, through the form of dividends.

Dividends are cash payouts you receive from an investment and are typically paid twice a year, some more frequently.

These payments aren’t guaranteed and can be cut or cancelled, as we saw during times of crisis such as the pandemic in 2020 and credit crunch in 2008. However, companies will do their best to sustain dividend payments as they recognise their importance to shareholders.

Dividends might be used to pay the bills if you’re in retirement or they can be used to help fund new investments. You might buy more of what you’ve already got, or use dividends to help add new names to your portfolio.