How To Make Your Money Work Harder For You
How To Make Your Money Work Harder For You

How To Make Your Money Work Harder For You

They can be dry, they can be complex, and they can sometimes be stressful. But the sooner you take charge of your personal finances, the better prepared you’ll be for anything. For anyone who’s managed to build or acquire a lump sum and wants to know what to do with it, we went to some financial planning experts for their advice on making it work hard for you.

Where does someone start with trying to find the best thing to do with their money?

“The first step towards making the right decisions is to establish a clear understanding of your financial needs, objectives and current situation. People seek financial advice for many different reasons, so it’s important that you understand exactly who you are and what you want to achieve.” – David Horowitz, partner, Gerald Edelman

“Identify your financial aspirations and what you’re aiming to do: whether it's building up enough to buy a new home, planning an exciting retirement, or having a safety net for unexpected adventures, or unexpected circumstances. Then think about your comfort with risks. Are you more of a rollercoaster enthusiast or someone who prefers a steady ride? Your attitude toward risk helps shape your choices. Finally, consider the timing of your goals. Is it a short sprint or a marathon?” – Sally Conway, savings expert, Shawbrook

“Once you have your objectives in place, you will have a much better idea of a timeframe for your savings, and therefore can make an informed decision on how much investment risk to take and what tax wrappers (such as pensions, ISAs, offshore bonds or general investment accounts) might be most suitable.” – Emma Watson, head of financial planning, Rathbones

If you’ve got enough money for a deposit, is the first priority always to get on the housing ladder?

“Not necessarily. Goals are different for everyone. There is certainly merit in property ownership: not being at the mercy of landlords and rental markets; property values generally increase over time; and having no rent or mortgage in retirement can be tremendously helpful from a retirement expenditure point of view. However, owning a property comes with ongoing costs of maintenance and you must be able to afford the mortgage with plenty of wiggle room. In short, it’s not for everyone.” – Zoe Brett, financial planner, EQ Investors

“Ever since Margaret Thatcher declared her belief in a ‘property-owning democracy’ and introduced Right to Buy in the Housing Act 1980, the UK has been a nation obsessed with the idea of homeownership. This has been fuelled by stories, some apocryphal and some true, of an uncle’s sister’s cat that in 1987 purchased a flat in Shoreditch for £50k only to sell it in 2019 for £3 million. Any decision you make should be driven by your financial needs, objectives and current situation. It is the dream for many to take that first step onto the housing ladder. However, at the same time I think it is important to think about your property as a lifestyle asset rather than an investment asset.” – David

Where should overpaying their mortgage rank on someone’s list of priorities?

“Frustratingly, there’s no one-size-fits-all answer to this question. There is a theory that repaying debt should be the number-one priority when you have any surplus of cash. However, the reality of this is going to be driven by factors such as the level of interest rate on the debt, repayment penalties on the mortgage, what other debts you may have, and whether you hold a cash liquidity buffer to make sure you are protected if the roof starts leaking.” – David

“The first priority is to ensure you have an emergency fund – we typically recommend 3-6 months expenditure. Beyond this, it’s really a case of what you’re looking to achieve. From a pure returns basis, if the mortgage interest rate is higher than can be generated in other investments/deposits, then it may make sense to repay the mortgage. However, other factors to consider are that you’ll lose access to that money and, historically, the returns from investing in equities have far outpaced what you would save in mortgage interest. That said, mortgage-free living can offer great peace of mind for your financial security, which you may find to be worth the financial cost.” – Zoe

If you already own your home, is property an attractive investment right now?

“It depends on your situation. Property is an illiquid asset, so if something happens and you need access to money, it could take months to sell the property, the costs to do so are high and you may need to take a loss if the market timing isn’t right. Then there’s the high maintenance cost to consider and the stress of running the property. What if renters don’t pay? What if they destroy the property? What if you have a period where the property is empty? Property can be a great addition to your overall wealth in the right situation. We would suggest building wealth in a diversified manner and retaining some liquidity rather than putting all your eggs in one basket. There are also other ways to invest in property without holding it directly, such as property funds and REITs. These can be worked into a diversified portfolio of assets in a far safer and less stressful strategy.” – Zoe

Given that interest rates are higher than they have been for about 15 years, is there an argument that, right now, you can just play safe and leave your money in a savings account that pays a decent level of interest?

“Having a high-interest savings account is like having a reliable friend. It’s safe and always there when you need it. You know where your money is and what you’re getting for it. But a savings account might not always keep up with inflation and it won’t ever outperform in the way some riskier investments can.” – Sally

“We have been in a low-interest environment for such a long time that seeing savings accounts offering 4% or 5% (where you have a balance over a certain amount) feels like an absolute bonanza. I am a believer that holding cash makes sense as part of an individual long-term financial plan – above all, make sure you have an appropriate amount in cash for a rainy day. However, cash returns should very much be viewed in line with inflation rates before making any decisions. Inflation erodes the real purchasing power of your wealth. This means your money today will likely buy less tomorrow. As an example, take the price of milk. In 1917, two pints of milk cost 2.4 pence. Fifty years later, you would only be able to buy one glass of milk with that 2.4p, and nowadays you would struggle to fill a teaspoon. This is why it’s important to invest, so you can grow your money and afford more goods and services (and milk!) in the future.” – David

“Over the long term, inflation eats away at the real value of cash savings and reduces their value. It’s a silent killer. Holding cash is necessary for meeting expenditure and covering off any rainy-day costs. Beyond this, though, we would want cash to be working to generate a return over and above inflation in the long run. This requires an appetite to take investment risk and move away from holding excess cash.” – Emma

Given inflation is high right now, is it still a realistic ambition for someone to protect the real purchasing power of their savings? How might they go about that?

“Absolutely – over the long term. With the exception of a few lucky calls, building real wealth requires a long-term view. Historically, long-term investing in a diverse portfolio of shares has outpaced inflation, so not just maintaining the purchasing power of money but increasing it.” – Zoe

“Investing in financial markets is the best way to protect against inflation, but this carries a number of other risks. Stocks, or equities, are notoriously volatile. They tend to do extremely well during periods of economic growth, and go through extreme swings when something big goes wrong like a recession. The main ways to minimise this risk are to diversify in stocks and bonds and to have a long-term investment horizon. This means that you don’t mind what happens tomorrow as long as your investments have paid off in ten years or so.” – David  

“Equities constitute more risk on investments though, so you would have to accept a potentially higher rate of volatility to try and outperform inflation.” – Emma

They keep coming up, so tell us a bit about the concepts of ‘risk’ and ‘diversification’ – and the relationship between the two…

“Our latest research found that 32% of women see the fear of risk as a barrier to starting investing, or investing more of their money. This is why it is so important to get used to terms like ‘risk’ and ‘diversification’ and get to grips with what they mean. Investing, and all that comes with it, shouldn’t be scary. It’s an important way to make our money work as hard as it can for us. When investing, there is a scale of risk. Generally, the higher the risk, the higher the potential returns; and the lower the risk, the lower the potential returns. You can manage your risk by diversifying your investments. All this means is that you are spreading your money across a mix of investments. Some will perform well at a time when others don't do as well, so they help to balance each other out. This is a good way to grow your money, while having a little protection too. It’s key to remember, though, that you should only start investing if you feel in a financial position to do so, are free of debt and have some savings set aside that you can access easily if you need them.” Emma-Lou Montgomery, Fidelity International

So if someone wants to start investing, do they have to be willing and able to lose everything they invest?

“No. In theory it is possible, but in an appropriately diversified portfolio the odds of this happening are remote. What you do need to be willing to do is leave the money alone. If there is a chance that you will need access to the money in the next five years, then it is better to not invest it. This is because investments will fluctuate up and down in the short term, but over the long term the expectation is that the investment will trend upward. If you need to access money at a point where the portfolio is down, then the portfolio doesn’t have the chance to go through recovery and experience the growth.” – Zoe

If someone is interested in stock markets, where should they start?

“Opening a Stocks and Shares ISA is a good place to start. It’s as simple as opening any other savings account and many providers will allow you to open one online – you will just need your national insurance number and a few bank details. You can start a regular savings plan from as little as £25 or make a lump sum payment with a minimum of £1,000. From here, it’s about picking the investments you want. If you are new to investing, funds are a good place to begin as you can start smaller, spread your risk, leave the investment decisions to an expert and benefit from lower fees. There are many ‘ready-made’ low-maintenance solutions out there, such as multi-asset funds, which do the job of choosing the right mix of investments for you. You can invest lump sums, make regular contributions, or choose a combination of both. A lump sum gets your money invested immediately, but if you worry about picking the right time to invest, as many of us do, you can drip feed your investment with a regular monthly contribution and spread it over time.” – Emma-Lou

If someone is thinking about retirement, is a pension always the best option?

“For most people, a pension is the best retirement savings option. Pensions are highly tax efficient in that you receive tax relief on your pension contributions at your marginal rate of income tax; assets held within a pension grow free of income and capital taxes; and pension assets are usually outside of your estate for inheritance tax purposes after two years. Employed individuals will typically have access to some sort of workplace pension. These are a great starting point as the employer will often match the employee’s contribution up to a set percentage, immediately doubling your money.” – Zoe

“Many of our clients remain unclear of their costs in retirement and how best to meet them. In 1990, an annual retirement income of £50k could be provided by approximately £350k of capital. Today, a healthy individual seeking to retire at 65 would need a capital sum in excess of £1 million to generate the same annual income. For many, gone are the days when retirement needs could be met by just a pension. The decimation of defined benefit pensions removed secured income in retirement for many; while at the same time, there has been a systematic decrease in how much you can save into a pension annually. The consequence of this is that many people will need to look to more than just their pensions as a source of financial security. We encourage clients to think about generating their retirement income across their different investment ‘pots’.” – David

“The biggest disadvantage of a pension is that you cannot access the money until you reach the national minimum pension age (due to rise to age 57 on 6 April 2028). If you want to retire before you reach pension age, you need to have a plan for how you would fund your expenditure until you can access your pensions.” – Emma

If someone has a shorter-term goal in mind, what options might they consider instead?

“My guidance to anyone who has a known capital expenditure in their short-term future is to avoid the investment market and ensure their money is held in a cash or cash equivalent. While I appreciate this is not a very sexy answer, ultimately, investing without a long-term plan in place is a form of gambling. I believe that the longer you stay invested, the greater the probability that your investment will generate a positive return. Once an investment strategy has been agreed, it is important to stick to it, in good times and in bad. I don’t believe in timing or playing the market.” – David 

“There are a range of deposit-based products specifically designed for shorter-term investing. Cash ISAs will offer tax efficiency as they are free from income and capital taxes. Fixed-rate bonds can also be a great way of investing for periods of 1-5 years. Typically, the longer you are willing to lock your money away, the better the rate of interest you’ll get.” – Zoe

It looks like inflation and interest rates have both peaked for now. Does that change your advice in any way?

“It’s near impossible to say exactly where we will be this time next year – and this is why investors should stick to the principles of good investment. Trying to time the markets, and what will happen next, is a real challenge without a crystal ball. Instead, I would always bear four key things in mind:

Keep an eye on the road ahead

“Living for today is one thing but you also have to keep an eye on the future. Are you saving and investing in line with your goals? Make time to look at your future investment goals and map these against your income and current job security, so you have a better idea of where you are today and where you need to get to. You can then use that to draw up a financial plan to do what you need to this year onwards.”

Automate your investments

“Setting up a regular monthly investment that won’t leave a gaping hole in your cashflow is the best way to stay focused and on track with your goals. By adopting a positive savings habit, where you invest a small sum on a regular basis, you remove some of the worry about not saving enough (or at all) and ease the anxiety that inevitably comes with picking the ‘right’ moment to invest a larger amount.”

Make sure you are well diversified

“The ‘golden thread’ of investing – staying diversified and investing in a mix of assets, from shares and funds to bonds and cash, across different sectors and geographies – comes into its own during periods of uncertainty. You wouldn’t want all your proverbial eggs in one basket only to have that basket come a cropper. It’s far better to mix it up and spread the risk of being overly reliant on any one asset class.”

Try not to get distracted by the daily performance of individual investments

“Even the experts find it impossible to time the markets – especially when thinking about 12 months or more ahead. Tinkering with your investments could also leave you at risk of missing unexpected opportunities that might arise from market corrections, while also posing the impossible question of when is best to buy back in.” – Emma-Lou

Finally then, how can an individual tell if they need a financial planner/wealth manager?

“I often get asked whether someone needs a wealth manager or whether they can do it themselves. The answer is that you probably can do it yourself. However, for most people a good professional can help you achieve your financial goals and bring you peace of mind. Helping you feel positive about your financial position as you move toward achieving your goals can be a major part of the value of professional financial advice.” – David

“We tend to suggest that professional advice is best suited to anyone who has over £100k to invest. When considering a wealth manager, it’s best to shop around for those who can combine plenty of life experience with a wide range of qualifications from diplomas to chartered or certified qualifications in financial and investment planning.” – Emma-Lou

“Once you have built up your savings to a few hundred thousand pounds or more, having an expert involved may start to offer much more value, as optimising the tax wrappers and investments will have a more significant effect. Age is also relevant, as the older you get, the more important it is to know whether you are on course to achieve your big financial objectives or not.” – Emma

And how might they go about finding a good one?

“Try to find someone whose approach resonates with you, and who can clearly articulate the value they are going to add to your circumstances. In an industry that is often relatively opaque with how fees are charged, I think it is also very important to work with someone who can be super transparent about the fees they are going to charge and what a potential long-term relationship would look like.” – David

This article is only for general informational and educational purposes. The answers provided do not constitute financial advice. You should not act or rely on any information contained in this interview without first seeking advice from a professional.

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