For today’s edition of Finspiration, saving expert, Maria Nedeva, is joining us on the Yolt blog to answer your burning questions on future-proofing your finances. From getting in the black to building interest.
Maria Nedeva is a Business Professor and investing guru. Her award-winning blog, The Money Principle, helps people from all walks of life get on track with their money, from tackling debt to investing smart, and building interest. And she doesn’t just talk the talk - between 2009 and 2015, she went from £100,000 in consumer debt to £150,000 in new investments!
So, ever wondered about the difference between an ISA and a SIPP? How about the basic hierarchy of investing? We’re thrilled to share Maria’s answers to these – and more – below
What does investing really mean?
Maria: The simplest way to define investing would be to say that it is money working for you and making more money.
What I believe is more interesting is the relationship between saving and investing. If we see saving as a caterpillar, investing is the lovely butterfly that comes out of it.
What would you say to someone who hasn’t saved anything yet – how do you get started? Is it too late?
Maria: Let me tackle the second question first: No, it is not too late to start investing for your future.
All hype about it being too late builds on the glorification of compound interest – this is when you don’t withdraw the interest your investments yield, and you get interest on the interest. Compounding is powerful, but I also believe that compound interest is somewhat overrated.
“It is never too late to start investing. It doesn’t matter how old you are - start investing now!”
How to get started is a bit more complex question. Still, bringing it down to mare basics, I’d say: set up a realistic direct debit to an account on one of the digital wealth managers (Nutmeg, Exo Investing, Scalable Capital, to mention but few). Live on the rest and let the investing platform do its best. (You should know how much you can put aside without damaging your quality of life if you manage your money properly. If, however, you don’t manage your money properly, investing is not what you should be focusing on -- you can read more about the ERR money management system, and the result it yields, on The Money Principle.)
How much do you have to invest to make it matter?
Maria: Any money you can put aside, and invest, matters. I’d start small if I were just beginning and increase what I invest gradually.
How much difference your investments make, and what kind of difference, would depend on what you’re aiming for. Do you want to retire early? Are you aiming to build a ‘normal’ retirement pot? Do you wish to be financially secure?
How much you need to invest to make it ‘matter’ is a question only you can answer because it depends on the lifestyle you aspire to have. Once you have created a vision of your future life you can calculate exactly how much you need to sustain it and how much you need to invest every month to achieve it. (There are many calculators that will help you do that.)
And yes; I can tell you exactly how much we need to live the life we want. You can find a retirement calculator to help you work this out here.
Work Pension vs. SIPP vs. ISA vs. Lifetime ISA vs. Savings Account – what’s the difference and how do you know which one to use?
Maria: This is a very big question that requires a long answer. This is why I’d provide an over-view largely lacking in nuance – but I will refer you to further helpful reading throughout my answers!
Under the Pensions Act of 2008 every employer in the UK must put certain employees (over 22 years old and earning more than £10,000 per year) in a work place pension scheme and contribute to it. Hence, most people should be contributing to a work place pension already. I’d suggest that anyone should check whether they contribute and if not to make this their investing priority – work pensions are great because your employer also contributes.
SIPP: Self-Invested Personal Pension
This is a way to take control over your retirement fund (instead of relying on a private pensions provider, for instance). You can think of a SIPP as the pretty wrapping paper around a sweet. You can use it to wrap different kind of sweets (stocks and shares, ETFs etc.). The good news is that when you put a sweet in the wrapping paper, the government will put in 20% more for you (you get an automatic 20% tax relief). Hence, SIPPs are versatile, hands on or easy (most digital wealth manager offer SIPPs) and tax efficient. The caveat is that you cannot take money out before you are 55; well, you can but you’ll be charged a hefty fee after which HMRC will tax you at 55%. There are also complex rules (I find most pension rules very complex) that need to be checked.
ISA: Individual Savings Account
At last count, there were six different types of ISAs (and there are different kinds within these types). You may refer to this guide on ISA for more on the types of ISA, how to choose an ISA, and the key rules of ISA. Stock and shares ISAs are what I’d suggest you open as a new investor (again, check the main digital wealth managers for possibilities). Lifetime ISA, or LISA, may help people who aim to save for house deposit or retirement funds but I’d see this as an addition to the ISA rather than instead of it.
Everyone needs a savings account, but it is not investing. Quite the reverse – at the moment most savings accounts pay far less interest than the rate of inflation. This means that you lose your money, guaranteed, if you keep it in savings accounts. These accounts are to keep enough money to survive for couple of months (this I reckon is enough time to regroup if things go wrong for you and start earning again).
How do you know which of these options to use?
Maria: There is a hierarchy in basic investing for the future. This is:
1. Max out your work pension contributions.
2. Build enough savings to survive moderate to serious financial crises (from having to pay to unblock the drains to surviving if you lose your job).
3. Investing in stocks and shares ISA and an Innovative Finance ISA (for diversification).
If you are self-employed, and/or have your own company, you should consider opening a SIPP – it is the most tax efficient way to build retirement income.
Naturally, there is much more to be said about investing but many people become financially healthy and prosper on these basics.
Investing is one thing – what else can you do to help future-proof your finances?
Maria: Here are six actions you could undertake to future-proof your finances:
1. Develop skills and competencies to make money.
2. Keep your money-making skillset up-to-date.
3. Diversify your investments.
4. Buy some gold coins and make sure you can access them easily. (The world is a very unstable place and if thing go seriously wrong gold may mean survival.)
5. Focus on hedging potential loss, not on potential gain.
6. Be mindful of greed and fear – they usually result in loss
It seems like there is a new investing app every day, how do you know which ones to trust?
Maria: When it comes to investing apps, I don’t act on trust. I research them, read reviews of them (take these with a pinch of salt) and test them. Which I use depends on reliability and functionality. (Have to say though that I’m not very adventurous in this. I have old favourites and very occasionally a ‘new kid’ makes it through.)
At Yolt, we believe in the power of Money Mindfulness – that’s the importance of every-day actions we can take to better secure our financial future. What every day tips would you add to a Money Mindfulness routine?
Maria: I’m all for mindfulness in personal finance. Still, I believe this can be tackled at two levels: symptoms and causes. Tackling the symptoms is about curbing spending. Tackling the causes for spending is about curbing cravings and lusting after ‘things’.
I believe that for money success we must be mindful of our cravings for things. This doesn’t mean we should limit our consumption to the bare minimum (except if we are committed minimalists), but that we should work out our priorities. Figure out what ‘enough’ means to you and stick to it.
To work out what is important in your life, you could use this priorities exercise.
If there was one thing you could tell your young self when it comes to money and saving, what would it be?
Maria: There are two things I’d tell my young self. These are:
- Pay attention to (don’t ignore) your money because it is what nourishes your life.
- Learn how to spend money and the rest will come.
That’s a wrap! Thanks again to the wonderful Maria Nedeva for joining us on the blog!
Remember, with investing, your capital is at risk. At Yolt, we’re on a mission to empower you with your money, but our blog is not official financial or professional advice. If you're not sure how to invest or what to invest in, seek independent financial advice