Why there’s no such thing as the best way to invest your money

If you have a lump sum that you’re not sure what to do with, it can sometimes be a bit overwhelming deciding how to save or invest it.

Taking to Google can produce dozens of different results. Some might suggest you invest your money in the stock market, others might suggest a high-interest cash savings account or ISA, while some will encourage you to use the money to pay off debts.

The key problem with these sorts of articles, though, is that they can’t take your personal goals into consideration. This is why there is no such thing as the “best” way to invest.

Goals are the key principle of financial planning

As frustrating as it might be when you’re in a hurry to make the most of your money, there’s no hard-and-fast rule about the best way to invest a lump sum. The most common answer you’ll hear from a financial planner is “it depends”.

While each option has its pros and cons, the only way to truly decide what’s right for you is by knowing what you want to be able to achieve with your money.

For example, if you’re saving for a goal that will happen within the next five years, the stock market may not be the right place for this particular lump sum. But if you’d like to put the money towards a long-term goal, perhaps for your retirement, you might prefer to consider wrappers that give your wealth the potential to keep pace with inflation.

Deciding what you’d like to achieve with your lump sum is the starting point for every financial plan and will help you to make the most suitable decision for you.

The stock market might not be the right place for your money

Lots of articles that you find on Google will say that investing in the stock market is the best way for your money to have the potential to keep pace with or beat inflation. While this could be true over the long term, if you think you’ll need access to the money shortly, other options might be more suitable.

Investing is a long-term strategy, so you should expect to leave any investments in the stock market for five years or more.

The reason for this is that investing opens you up to risk, so you could get back less than you originally put in. But keeping your investments for a longer period of time offers more opportunities for them to generate higher returns.

5 questions to ask yourself before deciding what to do with your money

As you can see, there are a lot of different things to consider when deciding your next steps with investing a lump sum. To help you to narrow things down, here are five questions to ask yourself that cover some of the crucial details that will help you to make your decision.

1. What do you plan to use the money for?

As discussed above, understanding what you want to use your money for and when you think you might need it is one of the key details that will allow you to choose a suitable wrapper for it. Is it something you want to tuck away for later in life or do you need access to the money shortly?

If you don’t know exactly what you want to achieve with this money, your financial planner might be able to help you decide using cashflow modelling. This is a piece of software that can produce a forecast of how much money you are likely to have at any given point in your life and uncover if you might have a potential shortfall.

This might be a helpful starting point for deciding where this money could be put to best use to improve your quality of life or allow you to achieve certain goals.

2. How much money do you have to save?

If the amount exceeds £85,000 and you’re thinking of keeping it in a savings account, you may want to split the amount across several different banks.

This is because, in the event that a bank fails, the Financial Services Compensation Scheme (FSCS) only protects you for up to £85,000 for each institution that you hold money with. If you have more than this saved with a single provider, you may not be able to get compensation for the entire amount if the worst happens.

Be mindful that some umbrella corporations own multiple banks, for example, NatWest owns Royal Bank of Scotland. So, follow the chain up to the owner to be sure you won’t get caught out if this is how you decide to save your money.  

3. How much risk are you prepared to take?

It’s important to be sure about how much risk you are prepared to take with your money before deciding to invest in the stock market because you could get back less than you put in. If you decide to invest in this way, there are different types of wrappers that cater for different risk appetites.

The most sensible way to approach this is to speak to your financial planner. They can help you to discover what level of risk is right for you based on your preferences, circumstances, and goals.

4. Do you have enough emergency cash reserves?

While you may not want to keep all of your wealth in cash, having access to a lump sum in case of emergencies is a good idea.

Most planners recommend having 3 – 6 months’ worth of expenses readily available. So, if you don’t have this at the moment, it could be a useful way to use the lump sum, or part of it, to increase your financial resilience.

5. How much debt do you have?

It might make sense to use the money to pay off expensive debt, such as credit card debt. The reason this should be a consideration is that when interest rates are higher, debt can become especially expensive. As a result, it’s possible that paying off these debts would make better financial sense than using savings or investments to generate returns.

Consider the example that MoneySavingExpert gives of £1,000 of credit card debt that is being charged at 22% interest. Over the course of a year, this will cost you £220 in interest. If you have £1,000 in a savings account paying 3% interest, this will earn you £30 over the course of the year.

If you used those savings to pay off the debt, by the end of the year, you could be £190 better off.

Get in touch

Whether you have a lump sum to invest or need help with a wider financial plan to create financial security for you and your family, we’re here to help. Email theteam@fortitudefp.co.uk or call us on 01327 354321.

Please note

Investments carry risk. The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The Financial Conduct Authority does not regulate cashflow planning.

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.