Though the restrictions on movement during lockdown have left many with a case of severe cabin fever, an unexpected upside has been Britons spending less and saving more.
The most recent data from the Office for National Statistics released this week, revealed that collectively, we have saved £157billion in just three months.
Meanwhile Bank of England figures show £11billion was poured into British easy-access accounts through March and April, compared to just £2.7billion during the same period in 2019.
A new survey has revealed the average Briton has saved £495 during lockdown
A combination of working from home and the near-enough complete closure of the hospitality industry means the vast majority of people don’t have their usual daily expenses and aren’t going to the pub after work on Friday – or any other day for that matter.
Meanwhile, major spending on holidays, weddings and home renovations has also come to a halt, meaning even bigger savings for some.
A survey by Creditfix.co.uk said 72 per cent of Britons are feeling positive about life after the pandemic with regards to their finances, with the average person saving £495 per month during lockdown.
And while less spending doesn’t bode well for the consumer economy, a newfound propensity to save certainly isn’t a bad thing.
But with interest rates remaining desperately unattractive, there are much better ways to make your extra cash go further – investing is one of them.
This is Money has an extensive collection of guides on how to get started including this one on choosing the best investment platform for you and this one on different investment strategies.
But here are some specific tips on what do you with your surplus coronavirus cash.
Before you consider investing, ‘spring clean’ your finances and identify any issues that should take priority such as paying off debts or building a ‘rainy day’ fund
Pay off your debts
The first thing to do if you’ve managed to save any money is to clear any debts where possible. Paying them off in one go is the best option.
Credit card bills are usually the first that should be paid off due to high interest rates, which can be anywhere between 10 and 50 per cent.
If you had £1,000 in debt on a credit card at 18 per cent APR, the average according to MoneySuperMarket, the interest would cost you £180.
If you had £1,000 in a savings account earning – a rather optimistic given the current climate – 1.5 per cent, the interest earned would be £15. So it makes economic sense to pay off your debt first.
The only exception would be if you happen to have a 0 per cent deal, and you are certain you can pay it off during the interest free period.
It all adds up!
A survey by AA Financial Services has revealed the average amount of money people have saved in a range of areas by not going out during the period of home isolation.
The biggest savings come from not spending on holidays or city breaks – with an average saving of £124 per month.
Overall, the average monthly savings made on eating and drinking out was £57.49 per month.
Other areas where Britons are saving, on average per month:
- High-street shopping – £53.46
- Weekend trips and days out – £48
- Car maintenance and fuel – £84.16
- Leisure activities e.g. cinema, concerts, gigs, theatre – £36.02
- Convenience food and ready meals – £27.45
You should also keep some ‘rainy day’ cash savings as a financial buffer for emergencies – it might be that you had to dip into yours during the current crisis, or maybe you didn’t have one at all so now would be a great time to set one up.
Interest rates are very low across the board though, so take a look at how much cash you need readily available and make sure you are getting the best terms possible.
Only after these steps should you consider feeding any excess cash that is highly unlikely to be needed in a hurry into investments for the longer term.
What are you investing for?
Once you’ve decided to start investing, think about what your goals are which would be very different depending on your age, how close to retirement you are and how much you can afford to lose.
Darius McDermott, managing director at investment research firm FundCalibre, says to imagine your ideal lifestyle.
‘This is a great way of thinking about your end goal – do you want a big wedding or a small one?
‘Do you want to pay off your mortgage ten years early? What kind of retirement do you want?’
Different aims mean different time frames to work towards and risk will vary so investing might not be the best option for some of them.
If you’re investing for a deposit on your first home which you hope to buy in 2025, knowing what you need to live on when you retire in 2050 is less relevant.
But if you’re investing to top up your savings pot for later in life, then understanding your spending needs helps to inform what and how you save and invest today.
How much do you want to have?
You’ve thought about your goals but now you need to think what you need to get there and how long it will take you. Are you hoping to make an income or to reinvest?
If you’re just after a bit of extra cash to top up your monthly income – or your pension, depending on your age – having the money paid out each month makes sense.
McDermott adds: ‘Lockdown should have made how you spend your money a lot clearer and what counts as “necessities” versus “nice-to-haves”.
‘If investing for retirement, this should help us decide how much money we need and what we would like to have each month. This gives us a much clearer goal than we perhaps had a few months ago.’
But if you’re aiming for a set amount, for a deposit for a home for example, reinvesting aims to get you to your goal faster as your investment earns interest on both the initial amount invested and accumulated interest – this is called compounding.
Set a ballpark figure as your goal and decide how much you’re going to put aside each month after your initial lump sum to help you get there and how long you’d like it to take.
Of course investing comes with risks and nothing is ever guaranteed so think long and hard about what you’re willing to lose.
How to invest
There are several ways to invest and the abundance of options can sometimes be overwhelming and make things appear more complicated than they really are.
First of all, are you after tax-free investing? There are several ways to do this, with an array of different limits and benefit.
Saving for a first home or towards retirement could mean investing into a Lifetime Isa is the best option, though there are lots of restrictions so read about the pros and cons here.
A self-invested personal pension is another alternative. Read about these in our Sipp guide here.
There are fewer restrictions with an ordinary stocks and shares Isa, but limits to watch out for. Have a look at what’s on offer here.
For funds, most people invest via a platform, such as Hargreaves Lansdown, Interactive Investor or AJ Bell.
You can also invest directly through an asset manager, where you can more easily access trading systems and monitor portfolios.
Juliet Schooling Latter, research director at Chelsea Financial Services, says when thinking about which platform to use there are a number of things to consider.
‘The first is the products they offer, then the service they offer and then the price,’ she said. ‘Each of us will have different needs so a platform that is right for one may not be right for another.
‘You have to decide if they have what you want – funds, trusts, shares – what level of service you require – only online, for example, or the ability to talk to someone on the phone – and how much you are prepared to pay for that.
‘When looking at costs also remember that the headline figure may not be truly representative – are there add-ons for certain services you may require.’
You should also consider how often you think you’re going to trade as some platforms charge per transaction while others offer a certain number of trades for a set monthly fee. This will affect which pricing structure you might choose.
Interestingly, lockdown has led to an explosion in the use of digital investment platforms, many of which offer commission-free trading (though make sure to read the small print!).
A study by Finder.com revealed younger generations in particular are embracing investing following the initial coronavirus market crash.
This includes platforms such as Moneybox, InvestEngine and Wombat, which invest largely in ETFs, or names such as Freetrade and Trading 212 which invest directly in shares.
Read our guide for more information on how to choose a provider.
The biggest saving people have made during lockdown has come from not spending on holidays – with an average saving of £124 per month according to AA Financial Services
What to invest in
Just like there are plenty of ways to invest, there are even more options when it comes to deciding what to invest in.
You can invest directly in stocks or shares or via a fund or investment trust from different industries across different countries across the world and of varying sizes.
Exchange-traded funds or ‘passive’ funds are one option that has been growing in popularity over recent years due to having cheaper fees versus their actively managed fund counterparts.
If you do decide to pick individual shares then make sure you research companies very carefully, learn to understand how to read their balance sheets and financial statistics and don’t just get swept along by what the hot tips of the moment are.
A good rule of thumb is, if your cab driver is recommending an investment, it’s probably peaked. Bitcoin was a great example of this.
Similarly, keep up to date with the latest fund and trust information by reading their factsheets, usually accessible via the investment house’s website.
This is Money’s investing page also has links to loads of tools including share prices, fund factsheets and broker views.
If you need some guidance on which funds to invest in, there is plenty of research and help available on investment platform websites themselves or research websites such as FundCalibre and Square Mile.
The what’s what of investing
When you buy shares you become a partial owner of the company. The value of your investment rises or falls as the value of the company rises or falls on the market.
It also brings a share in any profits that might be distributed through dividends. Often forgotten is that being a shareholder also brings some power and responsibilities.
As a shareholder you have a right to vote on key decisions, including directors’ pay, at the annual meeting or on particular issues like takeovers when they arise.
When investors talk about funds they are typically referring to either unit trusts, or open-ended investment companies, Oeics.
The idea is that as the fund invests in lots of different companies’ shares or bonds, the risk of you losing all your money is less than it would be if you were in a single company’s shares.
Most funds will have a manager who will aim to beat the market and provide the best return for investors (although, often they do not manage to do so.)
You buy a unit in the fund. Note, if a lot of investors start to withdraw their money from an open-ended fund, the manager can ‘gate’ the fund. This is what happened with Neil Woodford’s flagship income fund last year, and many commercial property funds earlier this year.
Investors’ money is locked in until the manager re-opens trading.
There is no limit on how many people can buy into an open-ended fund or the number of units, the fund just gets bigger and bigger.
Investment trusts are similar to funds in that they are run by a manager and invest in shares of other companies.
However they are listed companies themselves with shares that trade on the stock market. Investors can buy or sell these shares to join or leave the fund, but new money outside this pool cannot be raised without formally issuing new shares.
Trusts can be considered riskier than unit trusts because their shares can trade at a premium or discount to the value of the assets they hold, known as the net asset value.
They can also raise debt to invest, which open-ended funds cannot. Investment trusts also appoint a company board, which can act as a check on the investment manager.
Corporate bonds are used as a way of raising money for businesses – it’s essentially a certificate of debt issued by major companies.
When you buy bonds you are lending money to a company in exchange for an IOU. The IOU has a term and at maturity (typically five or ten years) the sum invested is returned in full.
The only thing that might stop this is if the company actually goes bust.
Once you’ve decided what you’re going to invest in, consider how you’re going to make your money work.
Jason Hollands, of investment advisers Tilney, says: ‘Hurried decisions may not be the best ones and while the sharp falls in stock markets this year present buying opportunities for those with cash to invest for the longer haul, it is understandable that many people will be feeling especially nervous about investing in the current climate when the news has been so grim.
‘Stock markets are lurching all over the place as they react to the latest news about coronavirus infection rates and actions being taken by government and central banks.
‘Investing in drips and drabs over time can help reduce the chances of ploughing a large sum in on a day prices bounce but then subsequently subside.’
Stick to your knitting
There is always a huge temptation to sell an investment if it suffers a fall in value, just as it’s tempting to buy a share that is doing really well and being hyped up.
But it’s better, once you have a system in place, to stick to it and try not to make any rash decisions, especially if there’s a market sell-off as was seen in March this year.
This doesn’t mean it’s best to rush to invest either during sell-offs. It’s impossible to tell when the market is at its bottom, so even if you invest on what you think is a low, things might fall further.
If you really want to make the most of a market dip, drip-feeding is a more sensible approach.
It’s better to slowly feed into the market, especially now, as it will still be volatile and there will be swings. Investing your entire pot in one go could be painful if markets were to fall dramatically immediately after.
There are going to be ups and downs at all times but over the longer-term, studies highlight the benefits of being invested through market cycles.
Joe Healey, investment research analyst at The Share Centre, adds: ‘Powers such as compounding will help build your capital over time. The earlier investors start, the more time these powers can generate healthy returns in the long term.’
Spread your risk
A key thing to remember to make your portfolio as ‘recession-proof’ as possible is to be diversified. Don’t hold all your eggs in one basket by investing solely in the UK or in one industry or asset class. Even worse, in one company.
And do look at other fund structures such as investment trusts. They can be particularly beneficial when it comes to down periods as many hold ‘revenue reserves’ – which is dividend income held back in the good years to help fund payouts in the bad years.
No investment is risk-free however, and there will be bad times as well as good times. But long-term, it’s likely your coronavirus cash will grow into a nest egg you can be proud of.
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