Hey. It is Kia. The world of investments can sometimes seem like a really murky, confusing place. There's a lot of loud voices on the internet talking about stuff like Bitcoin and NFTs, and it can really make investments seem like an extremely risky thing. That's only for the chosen few. If you have some money that you'd like to see grow, then this episode should be able to help you
understand what to consider and be wary of. There are different levels of risk and you don't have to be a tech pro to get investing. With me to get into all of this is Timi Merriman- Johnson. Timi is the founder of Mr MoneyJar, a financial education company, and he's also a podcast star and author. So Timi, let's
get into it. Can you give me a very entry level explanation on what investing actually is and what is and isn't considered an investment?
Sure thing. And thanks for having me here. I like to think of investing as a long- term form of saving where we set aside money today in expectation of a return in the future. If we don't expect the return, then we might be gambling or speculating, and if we expect the return right away, then we're trading. So it's just very important to know the difference between those three things.
I think that's very key. I think sometimes when you think about investing, you think about people with those charts, like you said, the trading, but I think that breakdown really just makes it simple for people to understand. So really and truly, anyone who has something like a workplace pension is already an investor, right?
Yeah, absolutely. So in the UK at the moment, if you work for a company and you earn more than 10, 000 pounds per tax year and you're age over 22, you'll be auto- enrolled into a pension. And this money isn't saved in cash. It's actually invested for you, albeit very much happening in the background over the course of your career so that when you come to retire you have a pot of money to either stop working or
to work a bit less. So yes, if you pay into workplace pension, you're already an investor, which is a fantastic thing.
So let's bring it back then. So if we're talking someone who's brand new to investing, what are the products that they should consider looking at?
So there's a few different types of investing accounts you can use. There are stocks and shares ISAs. There are lifetime stocks and shares ISAs, and there are also pension accounts, which we just mentioned, they're also a type of investment account. But if you're a beginner, you may want to start investing into a fund in a stocks and shares ISA as that lends itself well to people who are investing for the first time.
So how does that work? Is it, you just put money into that and that gets invested on your behalf if you put your money to a fund?
When you open a stocks and shares ISA with an investment platform, you have to nominate a bank account that you're going to top up that stocks and shares ISA with and then you can choose which fund you want to put that money into, so it's a two- step process.
But it makes that process a lot easier. You don't have to figure out what to actually invest into, specific stocks. It just makes it beginner- friendly. You put your money in there and I guess, invest on your behalf.
Yeah.
Amazing.
And then as we just said, pension accounts are also a type of investment account as well. They are called self invested personal pensions or SIPS for short, and they have their own annual allowance of 60,000. If you pay into stocks and shares ISA, let's say you max out at 20,000 pounds and your investment grows, you get to keep
that additional tax- free. You don't pay any capital gains tax or any tax on the income that you make through dividends and that sort of thing.
I mean, anytime I hear things are tax- free and we get money, to me it always-
We want to get money.
... puts a smile on my face. It makes me happy if we can bring home some extra money, we don't have to give it to taxes. That's always a good thing, isn't it?
Yeah.
I remember when it comes to investing, I remember I started investing at 20 and I did what you just explained. I downloaded a platform and I signed up, and I remember at 20 I'm in university and I remember thinking, " Wow, this is all brand new." But it was so exciting to start to learn. I mean, I didn't start investing straight away. I did what you just mentioned. I researched on all of them and found the best one
for me. But I think you breaking it down just shows that it isn't scary as people may seem. It is quite accessible, I think it is.
It's accessible and it's arguably the most accessible it's ever been because of the number of different platforms available. And I must say it's really great that you got started when you're 20. I got started investing when I was in my mid 20s and I wish I could have started sooner because a key component of investing is compounding.
So the great thing about the fact that you started so early is that even starting with just small stems and investing regularly gives your investments a longer period of time to grow and compound over time. And compounding is basically where you get growth on top of the growth that you already have. There's a exercise I like to
do when I give talks. I'll say to people, " What would you much rather have 10 million pounds today or one pound coin that doubles every day for 30 days?" And people can tell that it's a trick question. So they'll go for the one pound coin and I'm like, " Yeah, you're quite right. If you take the 10 million
pounds today, fair enough, you're a multimillionaire. But if you double one pound 30 times, then you're a billionaire because that's how compounding works with each additional day, your money is doubling and it can grow exponentially."
Compounding is the way. Let your money grow, put your money in, the growth can be on top of that growth. We love that. I think we've been talking about investing and I think it's also worthwhile mentioning that some employees are actually now offering workplace ISAs. So the benefits of
these is that they're convenience. You can paint to them through salary deductions, that's through regular payments or through a lump sum, and the service charges on them are usually better than they would be if you set it up independently. It's available for people through their employers, so it's also worth additional consideration for people to have a look at. Now, Timi, I want to talk about something. I
want to talk about risk. So when we talk about investing, we know there's obviously higher risk attached to investing than let's say putting money in a savings account, but what kind of housekeeping should our listeners do to prepare for this additional risk?
Risk and understanding your attitude to risk is very, very important when it comes to investing because it must be said from the very beginning that there's no such thing as a 100% risk- free investment. You're always taking on a degree of risk when you set that money aside
in the expectation of that future return. But the reason why we invest is because, and we can see at the moment with the rising cost of living is that cash tends to lose its value over time due to inflation. And so we invest so that hopefully our cash can grow at a rate faster than inflation and we can see that that's happening in the UK at the moment. But as you said, there are some very important housekeeping
things to do before we invest. Number one is to look at paying down high interest consumer debt. We know from the data that the average interest rate on an overdraft is about 40%. We know the average interest rate on a credit card is about 20%, and to get a 20% return on an investment year in year out would make you one of the best investors in the
world. It'd make you a Warren Buffet level investor. And so if you have high interest consumer debt, it's worth looking at either taking that to 0% or paying it down because that's money that you're losing. The other thing to look at is, so we said investing is a long- term form of saving, but short- term savings are important too. And so the very first place to start is
your emergency fund. So the way to think about your emergency fund is if you were to lose your primary source of income or an emergency was to happen, do you have enough money to get yourself through that without
having to rely upon debt? Saving an emergency fund before you invest means that should your investments fluctuate in value, which they will do from time to time, you have a pot of cash in cash that you can draw upon. The other thing to look at is things you'd like to do or have in the next year or two. As we said, investings for the long term, we tend to think of it in terms of years and decades
rather than in weeks or months. So if you're looking at the next one to two years and you have things that you'd like to do or have, this could be buying Christmas presents, going on holiday, saving for a house deposit will be a big financial milestone for a lot of people. Making sure that you're saving towards those goals as well is very important. Then anything over and above
that can go into investments. That's money that you don't need today and that's going to work for you going forwards.
I think that's good points that you've made about understanding risk and preparing for it. And I think I'm very big on emergency funds because we never know what's going to happen. It's so key to have a pot of money saved there just in case things happen.
And I'm really pleased to say that I think the pandemic has actually changed a lot of our attitudes-
It has.
... to risk as well. Earlier on in my career, the idea of having a pot of money set aside for seemingly no reason at all seemed very arbitrary to me. It's not something that I necessarily wanted to do, but I think the pandemic has shown a lot of us that you can lose your primary source of income and things can happen, your situation can change, particularly for
younger savers. They're actually really thinking about it and doing it in a very sophisticated way. So even though we're saying it on this podcast, I speak to lots of people that are doing this already and I think it's great.
Timi, what advice would you give to our listeners who are deciding, " Yes, I want to start investing," but they're trying to figure out what is the right investment for them?
That's a really good question. I think there'll be lots of different things to look at. Knowing how long you want to invest for will be a really key thing. Like we were talking about risk, yes, you can invest into individual stocks, for example, but that's actually the riskiest way to own company shares, so you may want to
look at funds for example. We know that there's a growing appetite for ethical investments, and so if you want to invest in a way that doesn't invest in arms or tobacco or that sort of thing, then that might
be a investment that's right for you. But also people with particular values like religious values, you may want to invest in like Shariah funds or Halal funds, that's another way that you can look at it. But I think the most important thing when it comes to investing and deciding what investment is correct for you is investing in something
that you fundamentally understand. So if you're investing into something because you've seen a hot stock tip on social media or your mate's doing it or you've seen something in the news, that's probably not the way that you want
to go about investing. You want to have a sense of why you're investing into it, whether it aligns with your values for how long you're investing into it so that should the value of the investment come down as it sometimes happens, you're not panicking because you haven't made a decision copying someone else. You've actually done your own research into that investment.
I agree with you, and I think it's also worthwhile adding on to what you said that personal finance and investing is just that. It is personal.
Personal finance is personal.
Exactly. So what you might do versus what I might do versus what your mom might do are probably going to be three different things going on. So it's all about finding and deciding what's best for you and sticking to that. So to run off this episode then, Timi, I'm going to ask you the question that I always
ask at the end of the episode. What are the three tips that you'd give to our listeners to help them get a little bit richer?
I think the first thing, and we touched upon this earlier on in the episode, is to try to stay away from high interest consumer debt. And if you have it, try to see if you can pay it down or get it to a lower interest rate. The second thing is to save up that emergency fund. The future is uncertain, but you'll know that if something comes up, you'll be able to put
yourself through that. And then to set aside small amounts of money every month, invest regularly for the long- term and you should be financially better off at the end of that.
Timi, thank you so much. You always give such amazing gems and that was no different, so thank you so much for coming onto this episode. This has been great. So a couple of things to say about all this, please don't put money into high risk investments that you cannot afford to lose. I know it sounds obvious, but
it's always worth keeping in mind. Once you're up and running, investment can be a great way to take more control over your finances and so can self- employment, which I'm going to be exploring next week. But while you wait, be sure to follow and tell your mates about the podcast. Well, that's if you have time after you've sorted your investment portfolio, of course. Bye.