What is the best way to invest money?

If you’ve been saving for some time or have a cash lump sum, you might be wondering how and where to invest your money. While stock investing might spring to mind first as one of the best ways to invest cash, there are several other options to consider. Your decision could have a huge impact on your future wealth, so it’s important to do your homework. Read on for details on the key things to consider before you invest, as well as guidance on the best way to invest money in the UK.

Investing your money can provide you with long-term financial security and help you build your wealth over time. Investments offer the potential for strong returns over the long-term, which can help your savings keep up with inflation and ease the impact of short-term ups and downs in the stock markets.

If you’re considering where to invest your money, it’s important to know what your savings goals are first. This will help you choose the most suitable savings or investment option for you.

You never know what’s around the corner. In addition to any financial investments you decide to pursue, it’s important to have savings to fall back on. Saving for retirement might be another important consideration to ensure you can enjoy financial stability in later life.

There’s no one-size-fits-all approach when it comes to investing, nor is there a “best way” to invest money. The best investment plan for you will depend primarily on your financial situation and risk tolerance. Think about what your investment horizon might look like, whether you’ll need access to your money, and what your financial goals are, both in the short and long term. Here are three of the most important things to consider before investing your money:

1. Your risk tolerance: Before getting carried away and choosing where to invest money to get good returns, one of the most important things to consider is risk. Investing money in the UK doesn’t provide guaranteed returns, so it’s important to understand the risk involved (that you might lose money). While seemingly high-return investments can be enticing, it’s equally important to understand the amount of risk you’re comfortable taking. Investing isn’t for everyone, especially if you’re more risk-averse, as no matter where you invest your money, it’s subject to unpredictable rises and falls. 

2. How much money you have: When looking into investing, it can help to consider how much money you have, as some investments may require a minimum balance or initial investment. It’s also important to assess your overall financial situation when considering the best way to start investing. If you have a mortgage or existing credit card debt accruing interest, it may be sensible to focus on paying off your loan or debt before starting to invest. This way, any potential returns from your investments won’t be cancelled out by the interest you continue to pay on your debt. Also, it’s generally a good idea to have an easily accessible emergency fund of around three to six months’ net income to cover any emergencies.

3. Your timeline and financial goals: When it comes to stock market investments, experts often recommend maintaining your investments for at least five years. This allows enough time for potential growth to balance out any rises or falls in the market. If you have fewer than five years to reach your savings goal, particularly if it’s for a short-term objective like a house deposit, a savings account could be the most suitable option. Similarly, if you’re approaching retirement, it might not be advisable to pursue high-risk investments. 

Of course, when considering how to invest money in the UK, there are other places to invest your money without taking such a big risk. If you’re more risk-averse and looking for the safest investment options, you might want to consider alternatives such as fixed rate bonds, notice accounts or easy access savings accounts. These options provide predictable returns without exposing you to the ups and downs that can come with riskier investments.

Whether you choose to invest your money or save, it’s important to avoid entering into an agreement for a financial product that you don’t fully understand. It’s worth consulting an independent financial advisor or conducting thorough research beforehand to ensure you’re completely comfortable with the terms of the product and the risks involved.

As we’ve mentioned, there’s no “best way” to invest money, as it’s down to your personal needs, your own appetite for risk, and your reasons for investing. However, if you’re wondering how to start investing, here are some of the most popular ways to invest money in the UK:

Stocks and shares

While savings accounts might be considered the best place to put your money without risk, investing in stocks and shares can give you a better return on investment if you’re prepared to take a risk and have a long-term approach. Investing in stocks and shares can be volatile and unpredictable, and might not be the best way to invest money if you’re new to saving or aren’t comfortable with the associated risk.

If you are a beginner and considering where to invest money, you might start by researching how to invest in stocks. Investing in stocks involves purchasing a stake in a company, with prices fluctuating throughout the day on the stock exchange. While there’s potential for capital gains if your stock investments rise in value over time, there’s also the risk of capital losses if the company’s value drops. There are various ways of investing in stocks and shares in the UK:

• Using a platform: You can buy and sell individual company shares through an online platform or stockbroker. When it comes to investing in shares, you decide which companies to invest in and when to buy or sell the shares.

• Funds: Investment funds pool money from multiple investors to buy a diversified portfolio of stocks and shares. You can invest in funds that match your investment goals and risk tolerance, with professional fund managers making investment decisions on your behalf.

• Exchange-Traded Funds (ETFs): ETFs are similar to investment funds but are traded on the stock exchange, as you would find if investing in shares. They track various indices or assets, offering diversification and flexibility to investors.

• Stocks and shares ISAs: Stocks and shares ISAs are tax-efficient investment accounts that allow you to invest in stocks, shares, investment funds, and ETFs. Any returns generated within the ISA are tax-free, making it one of the best long-term investment options.

Each of these options comes with its own advantages and considerations, so it’s important to research and understand them before deciding on the best way to invest money. Historically, stocks and shares have outperformed savings accounts, but there are no guarantees for the future. In general, when it comes to financial decisions, it’s a good idea to carefully consider risk. 

High-interest savings accounts

There are many different types of savings accounts to consider, and they’re generally low-risk investments. If you have a lump sum, you might want to consider investing your money in notice accounts or fixed rate bonds. Notice accounts provide the flexibility of being able to access your money after a set notice period, and typically offer competitive variable interest rates. Fixed rate bonds allow you to lock your money away for a set time at a rate that won’t change until your account matures. This stability makes them attractive during uncertain times or when interest rates are falling, as they ensure a guaranteed return on your investment.

Cash ISAs

Cash ISAs, or Individual Savings Accounts, are similar to traditional savings accounts, but provide the benefit of tax-free savings. There’s an annual limit of £20,000 on your deposits. There are three main types of cash ISA, each catering to different investment needs:

• An instant access cash ISA allows you to deposit and withdraw money at any time without penalty, although this might be limited by your ISA provider.

• Regular savings ISAs typically offer a fixed rate of interest as long as you deposit an agreed amount each month.

• With fixed rate cash ISAs, you lock your money away for a set period to earn a competitive interest rate. You’ll usually find that the longer the term, the higher the interest rate.

You can distribute your £20,000 ISA allowance across different ISA account types, as long as they are opened in different tax years. For example, you might opt to spread your risk by investing part of your annual ISA allowance in a stocks and shares ISA, and the remainder in a cash ISA.

Whether it’s better to put your money into an ISA or a savings account depends on your individual circumstances. The main advantage of an ISA over a savings account is that you can save up to £20,000 tax-free. However, savings accounts typically offer higher rates of interest. 

It’s also worth remembering that the personal savings allowance (PSA) means many people won’t pay tax on their savings anyway. The PSA allows basic-rate taxpayers to earn up to £1,000 of interest per year without paying any tax, while higher-rate taxpayers can earn up to £500 per year tax-free.

Children’s savings accounts

Children’s savings accounts are investments you can make on behalf of your children to put them on the path to financial security, while helping them understand how to save and why it’s important. This type of savings account typically offers more competitive interest rates than adult savings accounts, making it one of the best ways to invest money for your child’s future.

Similar to adults, you can open a junior ISA for your child, which offers a yearly allowance of £9,000. If you’re keen on finding an investment option for your child, a stocks and shares junior ISA could be worth considering. By opening one after your child is born, you have until they turn 18 to potentially see returns on your investment. However, it’s crucial to keep in mind that, similar to the adult version, stock market investments carry a significant risk to your funds.

Lifetime ISAs

A Lifetime ISA (LISA) is a type of savings account designed for people over 18 and under 40, and it’s intended to help you either buy your first home or save for retirement. While you can only save up to £4,000 per financial year in a lifetime ISA, the government will then add 25% to your savings up to £1,000 per year until you’re 50. You have the option of choosing between a cash lifetime ISA and a stocks and shares lifetime ISA, depending on your risk tolerance and how long you have to save. So, if you’re looking to get onto the property ladder or save for your later years (and get a little help along the way), a lifetime ISA could be the best way to invest your money.

Pensions

Paying into a pension is generally considered one of the best ways to invest money for your retirement. While you might already be enrolled in a workplace pension scheme, you could also consider additional options, such as a Self-Invested Personal Pension (SIPP). A SIPP offers a wider range of investment opportunities, giving you greater control over where your funds are allocated and allowing you to tailor your portfolio depending on your specific financial goals.

Peer-to-peer lending

Peer-to-peer lending can offer high-return investments, typically averaging between 8.86 to 13.08%, but this type of investment doesn’t come without risk. Peer-to-peer lending means you’ll invest your money into a business or project that needs capital to grow. Your investment is paid back to you with interest, as long as the business or project has succeeded. While this type of investment might offer lower risk in times of economic growth, it’s important to carefully assess the potential risks of each lending opportunity before committing your funds.

While you’re looking for the best way to invest cash, it’s important not to underestimate the importance of an emergency fund. An emergency fund can be an important safety net in the event of any unforeseen expenses. Having an emergency fund to fall back on might prove critical if you’re considering high-risk investments with good returns, where it’s also possible you’ll lose money. 

You may also want to consider how quickly you might need access to your emergency fund, as this will determine where you keep it. For example, you might keep it in an easy access or notice account, which both offer the flexibility of being able to access your money easily.

If you want to grow your savings without putting your wealth at risk, opening a high-interest savings account could be the best way to invest your money. The good news is you can access a range of competitive savings accounts through the Raisin UK marketplace.You first need to open a Raisin UK Account; then you can apply by logging in, applying for a savings account, and transferring your deposit.