When it comes to thinking about how to choose the best investment and the best way to invest money there are lots of options. Choosing the best investment depends on whether you are saving for the short term, planning to invest for a couple of years, or saving for the long term. When you are considering how to invest, think first about your savings goals, and then about how much risk you are prepared to take with your money.
With so much choice it's a good idea to think carefully about how you want your money to work harder for you. Consider how much you have to invest, what your goals are, and how much risk you should take with your money. You might also be interested in buying or switching your existing investments in order to make more money or buy into investments which are green or sustainable.
Here is our 10-step series of questions you should ask yourself in order to find the right investment for you in 2021.
How much money to invest is the most important question to ask when you are getting started in investing. When looking for the best investment, it helps to have an overview of all your personal finances. Do you have any debt that would be better to be paid off before you start investing? How much money do you need to live on before you can think about putting it into savings or investments?
The amount you are paying in interest on a personal loan, credit card debt or overdraft may be far more than you could get from a savings account right now. If you are paying a high rate of interest on your debts it is a good idea to clear them before you start saving. Don’t forget to check any terms and conditions of your credit agreement so that you don’t pay any penalties for paying off your loan early.
Next, check whether you have an emergency fund that you can keep in a bank account or building society account that can be accessed quickly and without penalties for withdrawal. Ideally, you should have between three and six months’ worth of household expenses saved up in case you need money quickly. If, for example, you were to lose your job you wouldn’t have to rely on a loan or expensive credit agreement.
You can find out more about savings accounts with our Uswitch guides.
Once you have your finances in order, you will have a clearer idea of how much you have to invest – in other words, which part of your disposable income you want to set aside for saving and investing. Then you should think about dividing your savings into three pots – short term money, medium term savings, and long term investments.
2. How long should I invest my money for?
When you're choosing where to invest your money and what to invest in, you need to decide when or how soon you will need access to it.
Are you prepared to tuck it away for a few years, or do you think you might need to dip into your savings in a couple of months? This will make a difference to your decision. Think about the money you want to invest and when you might need it.
Are you looking to invest a lump sum, or to set aside a regular monthly amount towards your long-term goals?
Will it be a short-term investment or longer?
How much money do you have available and will you be able to add to it on a regular basis, or occasionally?
How much risk are you willing to take with it? Can you afford to lose any of it?
Some investments also have a minimum financial commitment, so knowing what you can afford and whether you plan to make a one-off or an ongoing saving is a good starting point.
What is the best investment for short term money? If you will need your money within a couple of years, then the best place for your money is an easy access savings account, or a simple deposit account.
You can find the best rates on savings accounts by using our online comparison service. Regular savings accounts are also an option as they tend to pay slightly better rates than instant access accounts. However, you will need to commit to saving each month, and you may pay a penalty for making withdrawals before the end of the 12-month period.
Short term money includes funds that you're saving in order to have a deposit for your home. Money that you want to save up for home improvements. Savings for a holiday, or any sum of money that you will need over the next couple of years, and which you can't afford to take any risk with.
What are the best investments for medium term investments?
If you're saving and investing money that you will not need for three to five years, then you could consider using other types of saving and investment products.
The best investment options for medium term savings could be a number of different types of assets. You could invest in fixed rate bonds - these can be anything from one to five years. You could also opt for deposit accounts for which you have to give notice if you want to withdraw your money.
What are bonds? Bonds are a bit like savings accounts, in that they are low risk and pay you back your initial investment plus accumulated interest. They will probably pay you a slightly higher interest rate than a simple savings account, although with interest rates generally so low, the difference will not be huge.
You won’t be able to access your money for the fixed rate period unless you pay a penalty, so this is an option for money that you will not need in a hurry.
Bonds and other fixed investment products run for a fixed period of time, so if you have a specific date in mind as to when you need access to your capital, then some product types won't be right for you.
Medium term savings can also be put in savings products like Cash Individual Savings Accounts (ISAs), which are a tax-free wrapper in which to keep your cash. The money grows without you having to pay any tax on the gains.
You can read our guide for more about how Cash ISAs work.
The best investment options for longer term savings: If you can invest for five years or more, you have a lot of options. How and where you save and invest for the long term depends on your age, lifestyle and money priorities.
You could consider a Stocks & Shares Individual Savings Account (ISAs) where your stock market investments can grow tax-free. You could also contribute to a pension fund, which you will not be able to access until you are at least 55, but which gives you tax relief on your contributions. Your pension might be one run by your employer, or a private pension you contribute to yourself.
What are shares? You could consider a Stocks & Shares Individual Savings Account (ISAs) where your stock market investments can grow tax-free. You could also contribute to a pension fund, which you will not be able to access until you are at least 55, but which gives you tax relief on your contributions. Your pension might be one run by your employer, or a private pension you contribute to yourself. Shares are when you buy a share in a company or a fund on the stockmarket.
Shares shouldn't be considered as short-term investments, because they can fluctuate in value. However, they do give some protection against the rise in the cost of living and prices, known as inflation. This can affect the underlying value of your savings over time.
If you want to know how best to invest in stocks and build up an investment portfolio you could seek the advice of an independent financial adviser. They will be able to give you information on the best place to invest money and the different types of investment products that are available.
Or you can teach yourself by reading around on the internet, where there are lots of very informative investor sites with suggestions on the best investment funds and the best companies to invest in.
Find out more with our ISA Savings Guide
We all have different reasons for saving, and the purpose of your investment can affect how much risk you are prepared to take with your money. If your investment is to pay for your children's education, and you are putting away money from birth, then you may be investing over a long period of time, and looking for a higher return, as a result you may be inclined to choose a higher-risk investment option.
Conversely, if you're investing money to pay for an overseas trip, or a new car, you may be investing for a short period of time and want certainty about the outcome of your investment. So you may feel more comfortable with lower risk short term investments.
If you're looking for a regular income from your investment then this will influence your choice of product. When you come to access your pension you can either draw on it when you need some money, bearing in mind you may have to pay tax on the money you withdraw. Or you can purchase an annuity, which will provide you with an income for life.
Some investment funds are designed to pay regular income, as are savings accounts, and it is important to choose the best investment for your timescale and lifestyle, factoring in any potential risk to your capital as well.
You may wish to seek professional advice first before taking out such products so that you know what you are committing to, whether there are any charges, and how it might affect your tax position.
Read more about long term savings and planning for the future with our ISA Savings Guide
Your tax status is another important consideration. You need to factor in the tax implications of each investment option based on your personal circumstances - that way you will get a true picture of the return you're likely to make.
Find out more about investment and tax with our Uswitch guide
There are a number of tax-efficient savings products, which can help you reach your financial goals by protecting your investment income (known as dividends) and your growth (known as capital gains) from tax.
You receive tax relief on your pension, which can be a valuable way to boost the value of your contributions.
Individual Savings Accounts (ISAs) are a good way to protect your investment from tax. Everyone over 18 has their own individual ISA allowance each tax year. For the 2020 to 2021 tax year your ISA allowance is £20,000 and you can make an initial contribution and add to it as you go along, or make a series of lump sum payments into your ISA.
When you're thinking about where to save and invest, you can also use your Personal Savings Allowance (PSA), which is a tax allowance from the Government which enables you to earn interest before you have to pay tax. With the PSA, basic rate taxpayers have a £1,000 Personal Savings Allowance. This means they can receive up to £1,000 a year in savings without paying any tax.
Higher-rate taxpayers can receive up to £500 in interest from savings account before they have to pay tax. Additional rate taxpayers do not receive a PSA.
Whatever your tax position, you have to use your ISA allowance within each tax year and you cannot carry it forward.
Longer term, higher risk investment options may be more attractive to someone in their thirties than to someone who is getting close to retirement.
People tend to invest money in lower-risk products as their retirement approaches. Some pension funds automatically switch investments to safer havens in the five years before your stated retirement age. If you have a private pension you may have to ask your provider to do this for you, whereas most workplace pensions will start to make the gradual switch for you as you near retirement.
People often ask what to invest in now and look at popular or trendy investment, but it's important not to be driven by fashion. For example, if you're looking for safe investments then you don't want to be putting all your money in risky shares. On the other hand, if you're looking for the best way to invest £10,000, and you can keep your money invested for five year or more, then stocks and shares might be the best things to invest in. These types of investment could form a bigger part of your overall savings plan.
Your savings money is protected in the UK by the Financial Services Compensation Scheme. Find out how the FSCS protection works with our Uswitch guide.
If you're a parent with financially dependent children, then you're probably going to be more cautious with your savings than someone who is single and doesn't have any dependants, and therefore more likely to choose a low to medium risk and possibly short term investment.
For someone who is self-employed the priority may be finding a product that allows flexible contributions to suit a more erratic income pattern.
It's important that you to take a close look at your circumstances and how they affect what investment you opt for before you make a commitment. There are a lot of different ways to invest money – including property, fixed rate bonds, cash, shares and alternative assets. Think carefully about the level of risk you want to take. What seems like the best return on investment might be exposing your investment savings to higher levels of risk. You might be better with investment options that are more conservative if you want the best short-term investment product i.e. for five years or fewer.
Do you have a pension? Find out more about When should I invest in a pension?
If you already have a number of investments and feel that your future financial requirements are well taken care of, then you may be willing to take a higher risk with your next investment.
However, if this is your first and only investment then you may be more conservative in your choice.
The types of investment you already hold will also affect your investment strategy. If you already have investments in property, for example, you might want to diversify so that you don't have all your investments in one particular type of asset.
The best investment accounts are the ones that are aligned with your attitude to risk and your savings goals. If you're looking where to invest money to get good returns and which are the best investments right now. It's good to have a plan, which helps you decide how long you're willing to tie up your money for, and whether you can afford to ride out the fluctuations in value. If not, cash and fixed rate investments are better for you.
Read more about Savings Accounts and ISAs with our Uswitch guide
It's important that you feel comfortable with where your money is going, so if you have strong beliefs then it's worth seeking out an investment that fits with these. There are a number of green and ethical investments available as well as investments that are designed for specific cultural groups.
You might want to avoid investment funds that hold the shares of companies involved in oil and gas, mining, tobacco or other so-called ‘sin stocks’. Or you might want to choose funds that deliberately pick companies that have high standards of corporate and social responsibility. If you are looking for alternative investments there are lots of different options, although many of them are higher risk.
How do you feel about investment risk? Not everyone is happy riding out the ups and downs of the stock market, and if the thought of a particular investment makes you lie awake at night, then it's probably too risky for you.
You may need to consult an appropriate professional – financial adviser, accountant or tax specialist – about the tax implications of any particular investment in relation to your own circumstances.
It's also a good idea to review your portfolio on an annual basis after you've invested money. Circumstances change, so it makes sense to check that it still represents the best investment for you. The best investment plan takes into account your investment options, and your money goals. When you review the performance of your investment portfolio, you will be able to see whether you're on track with the best investments to make money or whether you need to change your plan.
If you are thinking of starting a pension, read our guide to Retirement Planning
As you invest money, it gets tied up and is no longer easily accessible. But, if you have a sudden need for cash how quickly and easily can you liquidate your asset? And what is the penalty for doing this?
If you think this may be an important factor for you then, it's worth knowing up front what the implication of getting out of an investment early is - if indeed it's possible.
Once you have answered these questions, you will have a better idea of the type of investments that would suit you. Financial advisers tend to recommend having a portfolio of investments, that way if one investment performs badly, you have others to fall back on. It also means you can plan so you have short term investments as well as long-term ones.