They say money talks, but when did you last hear what it had to say? We teamed up with social media illustrator InstaChaaz to listen in so we can get to know our money better. Check out the rest of our MoneyTalks blogs.
We’ve talked about what interest is, but how do you get it? And should you just aim for as much as possible? We’ll let these pound coins explain.
￼Understanding the risk vs return balance
These two little pound coins have very different approaches to life. One is in savings, getting just a little boost but unlikely to take a tumble. The other is in an investment, balancing in a place of higher return but higher risk.
Even before you think about what products you’d like and which provider you’ll use, this is a helpful way to think about what you’d like to do with your money. Of course, everyone has an appetite for lots of interest, but not everyone is willing to (or should) take on the higher risk to achieve that. Working out where you sit on this balance will help you find the best products for you.
Savings: low risk, low return
Savings are a low risk, low return option that almost everyone will explore at some point in their life.
Standing with its feet squarely on the ground, the pound invested in savings is very unlikely to fall. In fact, to make it even more secure, the government guarantees savings of up to £85,000 per provider (the Financial Services Compensation Scheme), so it really is one of the safest things you can do with your money.
The flip side (not that this little coin will venture anything so risky as a flip) is that it’s not going to deliver high returns either. Its returns will be consistent, but they’ll never soar. It will leave that to its tightrope-walking friend in an investment.
Investments: high risk, high return
The daredevil pound dabbles in investments. It climbs higher than the pound in savings, but there’s further to fall and it could even lose some of its original value if it hits the ground particularly hard.
As we watch that pound coin wobble its way across the high wire, you can also see its returns fluctuating: this pound coin is at the mercy of the markets. Sometimes the returns wire bounces a little higher and sometimes it’s a little lower. Sometimes, the pound coin falls off the wire altogether…
While investing offers greater returns, the risks are also much greater. Past performance is no indication of how the future will pan out, and there is a chance that your investment could crash and be worth less than you started with.
That’s why, if you choose to invest it’s important to make sure you know what you’re doing (or you seek advice). Things you should consider include spreading your money across different investments so that if one fails, you don’t lose everything. You should also plan to keep your money invested for a long time, to give the market time to recover if it does wobble.
Finding the balance that’s right for you
Choosing what balance of risk and return you’re happy with is an important part of working out what to do with your money. Savings are where most people start, but lots of people choose to invest too.
When you invest there are lots of different products and financial models to choose from, all with different risk and return profiles. And in recent years, even more have sprung up with the advent of things peer-to-peer lending, which Zopa pioneered in 2004. You can find out more about that on our website.
Check out more of our MoneyTalks blogs.