Investing can be daunting, especially if you’ve got £20,000 in the bank. But the current savings climate means it’s time to make your money work harder for you, and get you one step closer to achieving your goals.
One of the simplest ways to maximise your returns is to put your money in an ISA, as it allows you to build up your savings and investments in a tax-efficient manner. The government increased the ISA allowance to £20,000 in April 2017.
If you’ve already put your £20,000 in a cash ISA, don’t panic; you can easily transfer your money from a cash ISA into a stocks and shares one to benefit from the generous tax benefits.
What to do with £20,000
Cash used to be King, but with interest rates low for over 100 months, inflation has outpaced the returns on easy access cash ISAs.
For example, if you put £20,000 in a cash ISA offering the best rate of 1.05%¹, you’d have £20,210 after 12 months. Inflation reached 3% in September, which is well above the Bank of England’s 2% target.
Essentially, this means the purchasing power of your savings is going down over time. Not exactly what you want to hear if you’ve got £20,000 in the bank.
But this doesn’t mean you should just give up on your dreams until the Bank of England decides to hike interest rates again. Savvy savers have turned to the financial markets in the hunt for inflation-beating returns.
Investing is by no means a quick fix. If you want to buy a house in six months, you shouldn’t expect to double the £20,000 deposit you’ve spent ages saving up – it’s too short a time horizon to invest. However, if you want to buy a house in five years, you might look to the financial markets for the potential to grow your money and offset the impact of inflation.
How investing can help achieve your goals
Whether you’re saving for your first home, the car you’ve always wanted, or a comfortable retirement, understanding your investor profile is one of the first steps to achieving your financial goals.
Investing is all about balancing risk and return. By taking the time to think about what you’re saving for and when you’ll want your money, you can understand your tolerance to risk and invest in something that’s right for you and your family.
If you’re going to need your money in less than 12 months, it’s probably best to keep your cash in a savings account. If you have a longer-term investment goal, you can afford to take on more risk and expect higher returns – although your investments have further to fall, too.
The further away your financial goals, the more risk you can take. This means your investment portfolio will have a higher exposure to equities than bonds.
How to invest your £20,000
With £20,000 sat in your bank account, it can be daunting making the leap and investing your money. Whilst you may want to pick your investments yourself, this takes time, skill and money –it can feel like a full-time job.
The key is diversification. By spreading your money across regions and asset classes, you can reduce the risk in your portfolio. As asset classes rarely perform in line with each other, if one investment falls, you can hope to offset this with gains made elsewhere.
Achieving successful diversification isn’t a walk in the park. You have to calculate your portfolio’s asset allocation and regularly rebalance your investments based on thorough research.
You may want a professional to invest your £20,000 instead; but be careful, expensive management fees can eat into your returns and higher isn’t always better.
Low-cost investing is possible if you shop around, especially given the rise of digital wealth managers like Moneyfarm in the fintech space.
How to invest £20,000 in an ISA
Investors fall victim to ‘out of sight, out of mind’ syndrome when the ISA season winds down, but this can have a negative impact on your potential for returns.
Investing your ISA allowance earlier in the financial year means you can benefit from tax-free returns for longer and also give your investments more time to grow.
Remember, you can’t roll the ISA allowance over into another financial year, so it’s a case of ‘use it or lose it’.
Five tips to invest £20,000
It’s important to remember every family is different, and whilst what works for you might not work for your friends, there’s a right way for everyone. But here are five tips to help you get one step closer to achieving your goals.
- Make the most of generous tax benefits by investing your ISA allowance
- Look for to offset the impact of inflation on the market
- Invest in the way that’s right for you by understanding your risk tolerance
- Reduce risk in your portfolio by diversifying your investments
- Invest regularly to try and maximise your returns
1 Money Saving Expert