Boost your savings buffer
If you’re paying off debts you should consider using at least some of the £25,000 to clear them, starting with the most expensive (such as credit cards). Then it’s time to make sure you have an emergency (or rainy day) fund in place. This will act as a safety net to cover unexpected expenses, such as a broken washing machine, car breakdown or worse, job loss. Your emergency fund should be equivalent to between three and six months’ worth of outgoings and should be held in an easy-access account (separate from your current account).
Clarify your objectives
It’s useful to be clear about why you’re investing, as your objectives with £25,000 to invest might be different to those if you were investing £100, £1,000 or £100,000. Do you have a particular goal in mind for the money you invest? For instance, is it for something specific in the short-to-medium term, such as a home deposit, or a longer term goal related to later life or financial independence? The answer to these questions will help dictate the vital matter of how long you intend to stay invested and how much growth you expect.
Consider your investment horizon
The length of time for which you plan to invest will have a big say in how you invest your £25,000. If you have a time horizon of five years or less, with relatively short-term goals such as saving for a down payment on a house, you’ll want to consider lower-risk options such as a savings account or fixed-term deposit. These options generally offer a lower rate of return, but your capital is guaranteed and easily accessible.
In simple terms, if you want your money to grow as much as possible, you can do two things. Firstly, leave it invested in the stock market for as long as possible – at least five years – and only withdraw when it’s doing well. Secondly, lean towards investments with the greatest potential for high growth.
Maximise your tax allowances and boost your pension
Tax-advantaged wrappers such as pensions and Individual Savings Accounts (ISAs) should be the first port of call when investing your £25,000. Pensions are a tax-efficient way to save as basic rate taxpayers get a 20% tax top up on their contributions, while higher rate taxpayers get 40% tax relief and additional rate taxpayers an extra 5% on top of that (the income tax thresholds are slightly different if you live in Scotland).
ISAs have slightly different tax benefits, with no tax on any capital gains generated by the investments in a stocks and shares ISA and no further tax on any income or dividends. You get an annual ISA allowance of £20,000, which can be spread across Cash and stocks and shares ISAs. If you think you’ll need to access your cash before you retire, an ISA could be a better fit. In reality, however, ISAs and pensions complement each other and should both be part of any financial plan.
Understand the risks and rewards of investing
If you’re likely to be investing for at least five years or more, then more risk can be taken. For example, if you want some or all of your £25,000 to help you build a bigger retirement pot – and you’re still at least a decade from retirement – you could take more risk in exchange for potentially higher returns. Stock market-based investments such as shares, funds and investment trusts are ideal for long-term time horizons.
There’s always some degree of risk in investing – without it, there would be no reward. The level of risk you take will be dictated by factors including your age, circumstances, capacity for risk and appetite for risk. But remember, nothing is certain and some investments fail, so only take on risks you are comfortable with. Most investment platforms offer risk assessment tools that help investors get an idea of their risk profile. For more on risk and reward, read this article.
Prioritise diversification
It’s vital to have a diversified portfolio, which basically means not putting all your eggs in one basket. Diversification is key to managing risk when investing and it entails spreading your money across different types of investments rather than putting all your £25,000 into one or two stocks or funds. A diversified portfolio can include stocks, bonds, property, and other types of investments.
When you invest in funds you get instant diversification, and you can increase this by investing in a range of different funds investing in a variety of regions, sectors and themes.
Be flexible – and don’t panic
Market movements will affect the performance of your investments, so it’s wise to take a flexible approach to investment. By checking the performance of your portfolio every now and again you can see if any changes are needed and make any tweaks that are required. But avoid making emotion-driven knee-jerk decisions and try not to make too many changes, as the trading charges will mount up.
Investing is a long-term game, and it’s important to stay calm when stock markets are going through their more dramatic ups and downs. The stock market can be volatile in the short term, but over the long term, it has historically delivered strong returns. By staying invested and resisting the urge to make frequent changes to your portfolio, you can benefit from the power of compound interest and long-term growth.
Know what you’re investing in
We can’t be expected to understand everything about an investment, but it’s important to have some idea of what it aims to do. Every fund has a factsheet that’s updated monthly and available online and which will tell you its objectives, risk profile, the companies and sectors it invests in, its track record, fees and how it’s managed, among other features. Have a look at how to research investments.
Consider working with a financial adviser
If you’re not confident in your own investment knowledge, or if you’re unsure how to allocate your £25,000, it may be a good idea to work with a financial adviser. A financial adviser can help you assess your goals and risk tolerance and recommend investment options that align with your needs and objectives. However, it’s important to choose a financial adviser carefully and ensure that they are qualified and regulated. Our article on the questions to ask an adviser will help you find the right one for you.
Find the right platform for you
To inform your decision, consider how much support you’ll need and how much choice you’d like when choosing investments. Do you want recommended fund lists, learning material and a professional advice service, for example? Think about what you really need and avoid paying extra for anything you won’t use – it will all be reflected in the fees you pay. Then use our investment platforms tools to find the right platform for you.
You could use our free comparison tools to explore the robo-advice options available to you, while our investment fees calculator makes it especially easy. We begin with a mini questionnaire to determine what’s important to you and filter the market, then calculate how much they would charge you to invest with them. We also share our own expert view on each platform, based on decades of experience and without a trace of favouritism.
