Nothing makes me feel thick... (£1000pm to invest)

Bonus55

...more than trying to understand banking.

Honestly, I feel like I'm a relatively intelligent guy but I am completely baffled when it comes to money, banking, investment, etc, I really have no idea how it works and whenever I try to read even the most basic explanations I get completely lost in terminology I give up and go back to watching box sets.

I'm 31, single, no dependants, no debt, no hire purchases or items on credit, and I rent. I have a £500 credit card which I use monthly to buy takeaway/meals in order to build a credit history. My credit rating is poor but recovering due to a couple of defaults in my mid 20s.

Anyway, I have £1000 to £1250 ish "spare" per period (I get paid 4 weekly). This is a new thing to me really (2 months) and all I've done thus far is stick it in my Barclays internet savings account as I'm due to move house soon and keeping it handy for a rental deposit/fees.

I don't know what to do with it to make it most worthwhile.

What "worthwhile" is I don't really know: I guess saving for a house deposit is my first priority, but I want a significant deposit rather than the minimum and as I have no idea where I will want to buy I'm not in any rush. I'd like the option of a mortgage of £400-500k in around 5-6 years time if that helps?

Other than that, I'd like two other things from savings: a long term growth to supplement my pension and a more accessible saving fund for "rainy days" (potentially starting a small business, travel, that kind of thing). Basically 2 pots of money; one I can forget about and it become a nest egg for (early) retirement and one I can watch stockpile but take lumps out of as and when.

So from what little I've garnered I have the option to put about £15k into either a cash or investment ISA, or split it between the two?

I have a cash ISA that offers 0.75% which I've not even used yet. 0.75% seems like a pitiful return on investment in the grand scheme of things, barely worth bothering with?

I have looked at the Babypips website as I know a couple of people who earn a living from ForEx.... completely baffling. I have also looked at peer-to-peer lending as a form of investment which seems to offer modest returns (5%) but again, I'm not sure the best way forward. I've tried to understand stocks and shares (I even considered penny stocks!!) but from what I gather, without significant wealth to begin with it's largely pointless.

I've read about the Help to Buy ISA [I can't post the URL as I'm a new user but the article on this site] but I don't understand it:

you can save up to £200 every month and the Government will add 25% on top (so £50 on £200). You can also save an additional £1,000 when you first open it, meaning you can save £1,200 in the first month (that will have £300 added on top of it).

I can what? Save up to £200 a month? What if I put more in? What if I set up a 4 weekly direct debit? Where does this £300 come from? When do the government add their bit? Every month? At the end of the financial year? How accessible is my money when in this account?

Some other complete n00b questions about an ISA:
-You have an allowance of ~£15k per year, does that mean you need to open a different account per £15k or do you keep the same account and add up to £15k a year, resulting in an account that if you maxed out would grow ~£15k a year? ie, 15k, 30k, 45k, etc?
-If it is the same account, is interest paid on the entire balance? Or each year's allowance?

I just get so frustrated trying to understand anything to do with banking that I just get wound up, swear, put the kettle on and find something else to do.

Please help me! And explain as though you were explaining to a child as I just cannot get my head around even the most simple concepts of saving/investment!

Linton

Can you put more into your pension? This is particularly worthwhile if you are a higher rate tax payer or your employer will match any extra contribution.

I wouldnt touch ForEx - it's a zero sum game (what you win someone else loses or more usually vice versa) , highly risky, and not worthwhile unless you are a professional playing with £Ms. I also wouldnt touch anything unusual eg hotels in Cape Verde Islands, car parking places. These are usually scams, or at least they benefit the supplier far more than they benefit you.

This leaves you the main other options of Property, P2P lending, investing in shares/bonds, or cash.

Property I will leave aside as its more akin to running a business rather than straight investing.

Others can summarise P2Ps as I dont do it myself, yet.

To invest in shares its best to start with broadly based funds that invest in hundreds of other companies rather than holding individual shares. In this way you arent seriously hurt if one company goes bust.

If you are investing in funds (other than in a pension) its best to go for a S&S ISA. This avoids a lot of tax related hassle even though the amount of tax isnt generally speaking a major concern if you are a small basic rate investor. An S&S ISA wont cost any more than a non-tax protected account. You can only put money into one S&S ISA in any tax year and also one cash ISA (not strictly true but easier to look at it in that way to avoid complicated explanations). The total limit is currently £15240/year. IAll S&S ISA accounts and many cash ISA accounts can be left open to add extra money each year. Interest and investment gains are based on the overall current total.

If you are investing in shares/funds you should be thinking long term - say 5-10 years minimum. The reason is that share prices can be very volatile and you dont want to be in a position where you are forced to sell at a temporarily low price. You do need to accept that the value of your investments will fall, perhaps by up to 40% at difficult times (eg 2007/2008). However overall and given sufficient time values are expected to rise faster than inflation and faster than a cash account - say an average of 3%-7% per year above inflation.

It is usually recommended that any money you need in the next say 3-5 years is kept in a cash account and that you should also keep say 6 months living expenses in an instant access cash account to cover emergencies (redundancy, central heating blowing up etc etc). Dont expect to make any real profit from immediate access cash - expect that any interest will be less than inflation. The money is there solely for your financial safety. Currently available "high interest" current accounts are loss-leaders for the banks to get more customers so that they can sell them other products. These accounts may well disappear at some stage.

That's a high level view. Investing is a massive subject so you need to read as much as possible on the subject.

chris_m

Bonus55 wrote: »

Some other complete n00b questions about an ISA:
-You have an allowance of ~£15k per year, does that mean you need to open a different account per £15k or do you keep the same account and add up to £15k a year, resulting in an account that if you maxed out would grow ~£15k a year? ie, 15k, 30k, 45k, etc?

That's it, same account - unless you choose to open another for better interest or whatever. if you do that, you have to make sure that you don't put new money into both during the same tax year though.

You can also choose to transfer your entire balance to another ISA if that gives better interest or whatever - if you do this, though, you need to check the new provider accepts transfers in and get them to instigate the transfer. Don't remove the cash from the old one and expect to be able to just pay it into the new one - firstly, if the value exceeds the £15K or so allowance they won't let you pay it in because it will appear to be new money, and secondly, you'd lose the tax-free status of all your money from the old ISA.

-If it is the same account, is interest paid on the entire balance? Or each year's allowance?[/QUOTE]

Entire balance.

bigadaj

I might be over simplistic but for many if not most people the process should be similar.

You've no debts which is good, don't say what your current savings are, pension arrangements, salary etc though if you're considering half a million mortgage then presumably you earn quite well.

You can get a few tens of thousands into high interest current accounts and their associated regular savings accounts, all info on the site and the forum, looking at tsb, lloyds, nationwide, bos, Santander etc

On what appears to be a good wage then pension is the next thing, always look to contribute enough to get maxima employer contribution and ideally contribute enough to get tax relief down to higher rate tax threshold, though if you're saving for a house with a large mortgage then this might be difficult.

Isa allowance can then be used, little point in cash as the savings accounts above do better, so look at shares, many people start with a cheap broker and multi asset funds like black rock consensus, vanguard lifestrategy, l and g multi etc read in here and the monevator website for some background and ideas.

Peer to peer lending is good for some of your money, not an area I'm experienced in so will leave to others to comment if you are looking to pursue, I've just started looking on the p2p independent forum and am considering starting soon.

That just leaves property, buy to let is recommend by some but has some risks and is hassle, would also be difficult to get a mortgage without being a homeowner, and tax relief is being withdrawn on higher rates which makes it less attractive.

Hopefully the above helps somewhat but ask more questions and someone else may be able to help more.

Alpaca

bigadaj wrote: »

Peer to peer lending is good for some of your money, not an area I'm experienced in so will leave to others to comment if you are looking to pursue, I've just started looking on the p2p independent forum and am considering starting soon.

On this, most people start with the biggies (Zopa, Ratesetter, Funding Circle) but rates on those are getting less attractive and they're now not very competitive with other alternatives. (Of course these big guys are starting to play the "you wouldn't want to take a risk and go with a smaller player" card to try to scare people away from looking elsewhere).

But would be worth taking a look at some of the platforms that offer higher rates. On these platforms loans are mostly (or all) asset-secured e.g.,

Lending Crowd
Funding Secure
Money Thing
Ablrate

These pay 10-14% so a decent uplift on the cash current and savings accounts but will be less volatile than shares. Happy to give some further details on the above platforms if you're interested.

bigadaj wrote: »

That just leaves property, buy to let is recommend by some but has some risks and is hassle, would also be difficult to get a mortgage without being a homeowner, and tax relief is being withdrawn on higher rates which makes it less attractive.

There are a few new "property crowdfunding" platforms which mean that you can invest small amounts for part-ownership of a number of different BTL properties. This way, they offer some of the benefits of BTL (both rental yield and capital growth potential) but without having to manage tenants, void periods, getting a mortgage, upkeep etc etc. and at the same time allowing you to diversify across many properties rather than putting all your eggs in one basket. A kind of halfway house (haha!) between doing your own BTL and investing in a property fund.

The main ones I've come across are:

Property Partner
Property Moose
The House Crowd

They each have slightly different models and different approaches to when and how you can get your money out so worth paying attention to those points.

colsten

Alpaca wrote: »

These pay 10-14% so a decent uplift on the cash current and savings accounts but will be less volatile than shares.

Given that banks as well as some established P2P lenders are widely offering loans starting at 3.5% APR, anyone taking out a loan that costs 3 or 4 times as much must be very desperate. The risk of lending to such borrowers, and the risk of defaults must therefore be significant.

OP, if you are attracted by the promises of these sorts of providers, you would be well advised not to commit 100% of your money to any single one of them. You will also notice that the long-time posters on this forum are not pushing, or even mentioning, 10-14% returns. Remember the old adage - if it sounds too good to be true, it probably is.

Bonus55

Thank you all for your considered replies.

Can you put more into your pension?

That was something I was going to ask about actually, are pensions still a valid option nowadays? Both of my parents work in the public sector (teaching and healthcare) and have had their pensions shot at more than once in the last decade.

But to answer your question, I've paid the minimum into an employer contributed pension by default over the last 5 years, though only the last 18-24 months of that would have been valid numbers (salary prior to that was peanuts).
I've just moved over the the Railway Pensions Scheme (RPS 65) but largely because it is the one everyone tells you to jump on and is only available after 5 years of working on the railway. I don't think it is as Gucci as the old scheme (RPS 60) though, which is were the hype about this particular pension scheme comes from. I'm still waiting for the paperwork to come through but I'm aware of colleagues using a service which allows them to top it up ad hoc. All I really know about it is that it's a fairly high contribution

Going by the rest of your email Linton, I would surmise I that one potential option might be to split (net) income 4 ways:
-Long term savings in a S&S ISA (and/or top up pension on ad hoc basis?)
-Medium-long term savings in a cash ISA
-Medium-long term savings in a P2P or similar scheme
-Short-term savings in an easy access savings account

Food for thought anyway, I will take away each item and break it down on a spreadsheet!

You can also choose to transfer your entire balance to another ISA if that gives better interest or whatever - if you do this, though, you need to check the new provider accepts transfers in and get them to instigate the transfer. Don't remove the cash from the old one and expect to be able to just pay it into the new one - firstly, if the value exceeds the £15K or so allowance they won't let you pay it in because it will appear to be new money, and secondly, you'd lose the tax-free status of all your money from the old ISA.

Understood- it needs to be a formal, agreed transfer rather than a withdrawal & payment.

You've no debts which is good, don't say what your current savings are, pension arrangements, salary etc though if you're considering half a million mortgage then presumably you earn quite well.

No savings of note to date, only really started in the past couple of months. Pension as above, it's really only in its infancy. Salary isn't silly money (sadly) and I live in an expensive part of the country but I live a fairly simple life with few vices and no WAG or kids to drain it off. I'm over the tax relief annual allowance though.
Don't get me wrong, I could easily find things to spunk that £1k pp on, but I really want to get control of my life. Assuming I follow the career path I'm following, my salary should increase at a modest rate, faster than inflation and promotions could lead to bigger jumps.

Buy to let.... it goes against my principles in that I hate how easy it is for those with money to snap up property and sit on it at the expense of first time buyers/young people/less well off. That said, it's no good being altruistic and renting all my life and if I came from money I probably would have done the same.

OP, if you are attracted by the promises of these sorts of providers, you would be well advised not to commit 100% of your money to any single one of them. You will also notice that the long-time posters on this forum are not pushing, or even mentioning, 10-14% returns. Remember the old adage - if it sounds too good to be true, it probably is.

Spread the risk, an admin nightmare but I guess once established with standing orders the automation will take care of itself!

Again, thanks for all the replies.

Alpaca

colsten wrote: »

The risk of lending to such borrowers, and the risk of defaults must therefore be significant.

Which is why I mentioned the asset security that backs up most of these loans - much less risky if the platform holds first charge on physical assets which can be (and are) sold to recover funds in the event of defaults.

colsten wrote: »

OP, if you are attracted by the promises of these sorts of providers, you would be well advised not to commit 100% of your money to any single one of them.

Good advice. This goes for everything: diversify across asset classes, diversify across platforms and accounts within that class. And for something like p2p you'll obviously want to diversify across loans on each platform as well.

colsten wrote: »

You will also notice that the long-time posters on this forum are not pushing, or even mentioning, 10-14% returns.

Not pushing anything, just mentioning that it's out there. I'm assuming that people are mature and can make their own choices once they know what's out there.

And I'm afraid the second half of your statement is just straight-up untrue. Here are a couple of thoughts from jamesd (with over 18,000 posts and over 11,000 thanks to his name) posting about exactly the platforms I'm mentioning over on the p2p thread:

jamesd wrote: »

Why would you want to use Zopa or RateSetter and get around 5% when you can instead get around 12% using SavingStream, MoneyThing or Ablrate for secured lending?

and

jamesd wrote: »

Almost all of my P2P investing is at 12%+ yield before bad debt.

Alpaca

colsten wrote: »

Given that banks as well as some established P2P lenders are widely offering loans starting at 3.5% APR, anyone taking out a loan that costs 3 or 4 times as much must be very desperate.

This strikes me as a bit of a naïve comparison. Just because an individual (and then, only with strong credit history) can borrow £10k at 3.5% for 2 years, doesn't mean that a business can walk into their high street bank and get £2.5m for 6 months at the same rate! They're totally different markets with totally different requirements, levels of funds and therefore totally different going rates as well. Which means that higher rates doesn't immediately infer less credit-worthy borrowers, particularly if (as here) you're comparing apples and oranges.

Most of the platforms I mentioned don't lend to individuals so the rates Tesco (or others like them) will do for punters are irrelevant.

masonic

colsten wrote: »

OP, if you are attracted by the promises of these sorts of providers, you would be well advised not to commit 100% of your money to any single one of them.

This is good advice. There is fair agreement that up to 10% spread between a few of these platforms is sensible exposure.

You will also notice that the long-time posters on this forum are not pushing, or even mentioning, 10-14% returns. Remember the old adage - if it sounds too good to be true, it probably is.

Actually, several of the regulars here, myself included, have exposure to some of those platforms mentioned by the OP. There is plenty of discussion on these in the P2P thread. I do not think these fall into the 'too good to be true category'. There will, of course, be loans that go bad, as indeed there have been on some of the platforms, the key is therefore diversification across platforms and loans.

themanfromamarillo

A quick note on the OP's comments on cash ISAs and instant access savings accounts. These are generally not very good in terms of interest rates. From April you will be able to earn £1k in interest per year (£500 for higher rate taxpayers) tax free outside an ISA. At the moment the best rates are high interest current accounts (Santander 123, Club Lloyds, TSB Classic etc) and regular savings accounts (often associated with a high interest current account). You can get 3-5% vs 1.5% in a cash ISA. Note high interest current accounts may require a credit check.

On the Help to Buy ISA, you can put in £1000 at the start and then £200pm after that and will be able to save up to £12k. You'll get a 25% bonus if you use that money to buy your first property up to a value of £250k (£450k in London). It's likely you'd also get interest on that. https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/414027/FTB_factographic_final.pdf