Investing made simple

Investing can seem daunting – perhaps particularly for those in their early 20s who are keen to grow their wealth but unsure where to start. With living costs increasing and financial pressures like housing affordability making saving a challenge, you might wonder whether investing is worth it.

From chatting to the final year students we meet, many feel they lack the knowledge to be able to invest with confidence. While managing day-to-day expenses is a priority, understanding how to grow your wealth over time is also important.

This guide breaks down the essentials, making investing simple and accessible so you can take control of your financial future. Please note that this is a guide to help you understand the basics and does not constitute as financial advice.

How does investing work?

At its core, investing is about putting your money to work so it can grow over time. Rather than leaving your savings sitting in a bank account earning (what is currently) minimal interest. Investing gives you the opportunity to build wealth, beat inflation and secure your financial future.

Understanding how investing works is a key part of financial literacy. The choices you make now – whether it’s starting small with regular contributions or learning about different investment options – can have a significant impact on your long-term financial security.

Investing might seem complex, full of jargon and risky, but you don’t need to be an expert to get started. The most important thing is to understand the basics, start early and stay invested. Here’s what you need to know.

The power of starting early

One of the biggest advantages you have right now is time. Investing is a long-term game, and the earlier you start, the better.

This is because of compound growth – the idea that money doesn’t just grow, but the returns on your investments also start generating returns over time. Think of it like a snowball rolling down a hill. It starts small, but the longer it rolls, the bigger it gets.

For example, if you invest £100 a month from your first year of work, you’ll likely end up with a much bigger pot than someone who waits 10 years and then starts investing double that amount. Time is your best friend when it comes to growing your money.

Should you pay off debt first?

If you have credit card debt or personal loans with high interest rates, you may want to clear them before you start investing. This will depend on your personal circumstances. But if you have a student loan, things are different.

• Student loans in the UK don’t work like normal debt. You repay a percentage of your income above a certain threshold, and any remaining balance is written off after 30 or 40 years, depending on the plan type.
• If your loan has a lower interest rate than your potential investment returns, you may be better off investing rather than making extra repayments.

The key is balancing your priorities. If you can afford to invest while comfortably making your repayments, it’s worth considering.

Why you can’t time the market

Many people think they should wait for the ‘perfect’ moment to invest – maybe when the stock market dips or when they feel more financially stable. But the reality is, no one can consistently predict the best time to invest.

• Markets go up and down all the time, but history shows that staying invested for the long-term tends to pay off.
• Missing just a few of the best-performing days in the market can massively reduce your returns.

Instead of trying to guess the perfect moment, another strategy is to invest regularly – which leads us to the next point.

How to invest regularly with pound-cost averaging

Rather than investing a lump sum all at once and stressing about whether it’s the right time, many investors use a strategy called pound-cost averaging.

This simply means investing a fixed amount of money regularly – say £100 a month – no matter what’s happening in the market.

• When prices are high, you buy fewer shares.
• When prices are low, you buy more.

This approach smooths out the ups and downs and removes the stress of trying to time the market. Setting up a regular investment plan is an easy way to get started.

What can you invest in?

There are many different types of investments, but two of the most common are:

• Equities (stocks/shares) – buying a small piece of a company. Equities have the potential for higher returns over the long-term, but some with more ups and downs.
• Bonds – lending money to governments or companies. Generally lower risk, but the potential returns are also usually lower.

Many investment portfolios contain a mix of both.

Active vs. passive investing – what’s the difference?

When choosing an investment approach, you’ll come across active and passive investing.

• Active investing – a fund manager actively picks stocks, aiming to beat the market. This can work well but comes with higher fees.
• Passive investing – investments track a market index (like the FTSE 100) and simply mirror its performance. Generally, fees are lower but returns will rarely, if ever, ‘beat’ the market.

Which one is better? It depends on your belief in active managers’ ability to outperform over time – and whether you’re happy paying higher fees for the chance of higher returns.

Why diversification matters

You’ve probably heard the phrase “don’t put all your eggs in one basket” – which is what diversification is all about.

• Spreading your money across different investments reduces risk.
• If one investment performs poorly, others may perform well, helping to balance out your returns.
• Diversification applies across different asset types (such as stocks and bonds) and regions (such as the UK, US and emerging markets).

A well-diversified portfolio protects you from big losses if one investment crashes.

Tax-efficient investing – keeping more of your money

If you’re investing, it makes sense to use tax-efficient accounts to maximise your returns. Some key options are:

• Stocks and shares ISA – your money grows free of capital gains and dividend tax and you can withdraw whenever you like.
• Pensions – great for long-term saving, with tax relief on contributions. However, you can’t access the money until later in life.
• Lifetime ISAs (LISAs) – if you’re saving for a first home, the government adds a 25% bonus on contributions up to £4,000 a year.

Using these options can boost your investments without extra risk.

Tax treatment depends on your individual circumstances and may be subject to change in the future.

How to choose an investment platform

Before you start investing, you’ll need to pick a platform. Things to consider:

• Fees – check for account charges and trading costs.
• Investment options – some platforms focus on funds, while others offer a full range of stocks, bonds and funds.
• Ease of use – does it have a good app or website?
• Educational resources – useful if you’re new to investing.

Choosing the right platform can make a big difference to your experience and long-term returns.

Avoiding scams and bad advice

With so much information available online, not all of it is reliable.

• If an investment sounds too good to be true, it probably is. Be wary of anyone promising ‘guaranteed’ high returns.
• Social media is full of financial influencers – some are good, but many aren’t. Always check their credentials before acting on anything they say.

A slow and steady approach beats chasing fads every time.

Final thoughts – what happens next?

Investing doesn’t have to be complicated. By starting early, staying invested and diversifying, you can build long-term financial security.

Here are some steps to get started:

1. Decide how much you can invest each month.
2. Choose an investment platform that suits your needs.
3. Start with a simple, diversified portfolio – don’t overcomplicate it.
4. Set a reminder to review your investments once or twice a year – not daily.

As mentioned, this isn’t financial advice. It’s just a guide to help you understand the basics. If in doubt, do your research and seek professional guidance before making big investment decisions.

The value of investments, and any income, can go down as well as up and you may get back less than you invest.