YOUR MONEY If you are ready to take the risk of stock market investment, there are a few basic ground rules you need to be aware of before you start.
Pay off your debts
Before you start investing you should:
- Pay off credit cards, personal loans, overdrafts and store cards. The interest charged on what you owe is likely to be higher than the return you might get from your investments.
- Consider making mortgage capital repayments as an alternative investment. It is equivalent to earning tax-free interest at the mortgage rate. Some advisers say that paying off your mortgage early is one of the best investments you can make.
- Build up an emergency fund in a low-risk account. Most financial advisers recommend an amount equal to between two and six months' net salary as a useful cushion.
- The best savings rates are usually offered by internet, telephone-based or postal accounts. Look for an account where there are no penalties for partial or full withdrawal, and the rate is not going to drop after an initial introductory period.
- You can consider putting up to £3,000 a year into a mini cash ISA, to get tax-free interest. But remember that you will then only be able to put up to £3,000 a year into a mini stock market ISA.
| Tip Check the rate you are earning on your savings regularly. Many initially competitive accounts do not remain so after a few months, often because a bonus rate no longer applies. |
How much should you be saving and where should it go?
Where you save and invest often depends on which stage you have reached in your life.
Here are some suggestions based on your life stage. They all assume normal living expenses, protection and insurance needs have been covered and pension contributions made.
Young and single
- 10 per cent of net income into short-term cash savings accounts
- 5 per cent of net income into medium/long term savings and investments via equity ISAs.
Young and married/attached
- 5 per cent of net income into short-term cash savings accounts
- 10 per cent of net income into medium/long-term savings and investments via equity ISAs, regular savings traditional accounts or insurance-based contracts
Young, married/attached with children
- 5 per cent of net income into short-term cash savings accounts
- At this stage in your life, you may not be able to save anything for the medium or long-term. But if extra cash is available, it should go into a mini equity ISA, high-paying savings account, or insurance-based contracts.
Mid-life
- 5 per cent of net income into short-term cash savings accounts
- 15 per cent of net income into medium/long-term savings and investments via equity ISAs or regular savings traditional accounts, or insurance-based contracts.
Pre-retirement
- 5 per cent of net income into short-term cash savings accounts
- 25-30 per cent of net income into medium/long-term savings and investments
| Tip Keep a regular check on the balance you hold in your current account. If it is well above the amount you need, transfer it to your savings account or set up an investment. |
