The (new) commitments: investing in the prime of life

When you’re in your salad days, some of the best advice you can get is to start saving, build an emergency fund and start a pension. But what about the next step?

By the time your 30s have got into their stride, things are probably looking more serious. True, your earning power has probably increased, but so too have your commitments. You may have a house and mortgage payments to keep up; maybe your new responsibilities include a growing family; maybe you’re still paying off debts from your 20s. You’re also probably aware of a nagging urge to start setting more aside for your future security. Whatever your situation, you need to adopt a more sophisticated approach to making your cash work. Our experts at Money-farm can help.

Future thinking

The first step is to determine your priorities. With so many competing demands on your bank account, you won’t be able to plough your money into every project that takes your fancy, so make a list of your most important life goals – including your targeted retirement age – and then start thinking about the steps you need to take to bring these to fruition.

If you outline your aims from the outset, it makes it easier to structure your savings and investments. As well as asking yourself: “What am I saving for?”, you need to think about time frames. Do you need the money in the next couple of years – say, to finance a house deposit or a dream holiday – or not for the next few decades?

The situation is more complicated if you have a young family – you need to be thinking about their future too. As well as deciding what proportion of your income you can afford to stash away for your young ones, you have to decide how it’s invested and, indeed, what it’s being invested for. Are you saving for their education or are your goals more long-term?

Revise your portfolio

One of the most common money missteps that can derail your long-term plans is being overly conservative about how you save money. That’s particularly true right now when inflation expectations are rising while interest rates remain super-low. So if you haven’t yet started investing, there’s never been a better time to decide to take the plunge.

If, on the other hand, you already have investments, you’re at an age when you may need to revise your portfolio. Time is on your side, so generally you can afford to opt for a more pacey mix of investments than, say, someone approaching retirement. History suggests that stocks and shares provide a higher return than other investments in the long run – though obviously the asset allocation model you choose will depend on personal factors including (some would argue most especially) your risk tolerance.

At Moneyfarm we can help you design a portfolio that takes into account factors such as whether your assets are sufficiently diverse to help hedge against market losses, by using different types of investments and asset classes. We can also advise on whether and how often your portfolio needs to be re-balanced. What worked for you a year ago might not be practical now. You also need to think about tax planning. Unless your

investments are contained within a tax-free wrapper like an ISA you will have to pay tax on any gains you make above the annual capital gains allowance when you come to realise them. The same is true when you come to realise other investments like property (unless it’s your primary residence).

If you haven’t opened an ISA yet, you should consider making it a priority. From April 2017, you can put £20,000 a year in and enjoy all the returns tax-free. It’s also worthwhile taking a look at the different kinds of ISAS available. For instance, if you’re scrabbling to get on the housing ladder and saving for a deposit, you might make the Help to Buy ISA a priority – not least because the government adds a 25% bonus to your savings (up to maximum of £3,000) when you use the cash to buy your first home. This April also sees the launch of the new Lifetime ISA, which is specifically aimed at the under40s. This allows you to save/invest up to £4,000 a year and receive a government bonus of 25% on your savings (that is, up to £1,000 in free cash) each year until you are 50. And you can run it alongside an existing stocks and shares or cash ISA.

Another consideration when tweaking your portfolio is investment fees. There is no point scrimping to save if your hard-earned cash is then swallowed up by pricey investment platforms and other charges. That’s why at Moneyfarm we aim to keep our costs as low as possible: there are no additional hidden charges beyond basic management and fund fees.

Tactics for saving without stress

• Drip, drip, drip. While generally the best-performing place to put your cash, it is the nature of markets to move up and down and that can certainly be stressful at times – in fact, the first lesson of investment is that past performance is never a guarantee of future success. That’s why when it comes to building a comfy nest egg, slow and steady is the route to take. The easiest and – as it turns out – most effective way to invest is to set aside money every month and channel it straight into your fund by direct debit. Not only does this reduce the risk that you’ll blow the cash on something else, but it’s also the best way of smoothing your returns and protecting yourself for the long term when markets turns downwards. If you drip-feed your cash into the market regularly, you benefit from a process known as ‘pound cost averaging’. It means you automatically end up buying more shares when prices are low (generally agreed to be the most effective way of making money longterm) and fewer of them when prices are high. Being ‘greedy when others are fearful’ is a well-known investment adage, but it can take guts and self-discipline to take that contrarian line. The drip-feed approach means it happens naturally.

• Invest your pay rises. If you’re fortunate enough to get a pay rise and are living within your means, divert the excess to your savings immediately.

Safeguarding your loved ones

If you have children, the best way to give them a strong financial start in life is to save on their behalf. One thing no parent can say these days is that there aren’t enough vehicles to help. Another thing to consider is insurance. We all like to think we’re invincible in our 30s and 40s – sadly, that’s not always the case. So an important decision you need to make, when allocating your investment cash, is whether you also need a life insurance policy. And while on that subject, if you haven’t yet made a will, make it a priority. Without one, you will have little say on how you split up your estate because it becomes subject to intestacy rules, which may mean your spouse or civil partner doesn’t receive as much as you intended them to. Unmarried partners may not receive anything from your estate unless you have made a will in their favour. Making a will also enables you to make specific financial arrangements on your children’s behalf.

A financial safety net

This is a pivotal time of life. The financial decisions you make in your 30s and early 40s will largely determine the shape of the rest of your life. By investing for growth and creating a financial safety net, you can avoid some of the worst financial minefields.

“BY THE TIME YOU’RE IN YOUR 30s, YOUR EARNING POWER HAS PROBABLY INCREASED, BUT SO TOO HAVE YOUR COMMITMENTS: A MORTGAGE, A GROWING FAMILY... BUT, WHATEVER YOUR SITUATION, YOU NEED TO ADOPT A MORE SOPHISTICATED APPROACH TO MAKING YOUR CASH WORK”

Visit moneyfarm.com/switch to find out more or call one of our Investment Consultants on 0800 433 4574.

Your capital is at risk. Investments can go down as well as up and you may get back less than you originally invested. Moneyfarm is authorised and regulated by the Financial Conduct Authority no. 629539