In the second part of our Q&A, we dig deeper with Iona Bain on her recommendations for investing and saving for the future. Missed part one? Read it here.
What is the very first step you would recommend for someone who is keen to start investing?
I would start by understanding what your capacity for investing is. Have you nailed your everyday budgeting? Have you paid off expensive, chronic debt? Have you got an emergency savings fund? Do you have income protection? Investing starts when you can answer ‘yes’ to each of those questions.
Then, you have to address two big issues – whether you want to buy your own home, and how you can maximise your pension savings. If you are a budding first-time buyer, you need to look seriously at the Lifetime Isa and what that can offer you and be clear on how much you need to save. Maximising your pension is something we should all do in an ideal world, but you’ll be the best judge on how to balance that with other shorter-term goals.
A good start is looking at contribution matching – i.e. seeing if your employer will increase their contribution if you increase yours – and switching out of the default to a more adventurous or ethical alternative. Then you’re in a great position to explore the wider world of investing.
What advice would you give to someone considering a socially responsible pension?
Don’t let perfect be the enemy of good. Huge progress has been made on improving environmental, social and governance (ESG) standards in the companies held in your pension. Yes, there’s an awful lot of work to do, and we all have to be alive to the risks of greenwashing – i.e. companies and fund houses depicting themselves to be more ethical than they really are. Having said that, ethical investing is very subjective and will we ever get to a point where every major company has impeccable credentials in every department? We can’t afford to wait, so my advice would be to get informed, be prepared to engage, have your red lines and focus on making small but real change, rather than do nothing to preserve glorious ideals.
What is the best way to save for a deposit on a house?
Lifetime Isa, Lifetime Isa, Lifetime Isa! If you are committed to saving for your first home, it’s an absolute no-brainer because you are getting free money from the government – up to a grand a year. It blows all other interest rates out of the water. You just have to make sure you have savings elsewhere to draw on in a crisis because the LISA comes with a steep penalty for withdrawals. I’m not a fan of it, but it doesn’t have to be a problem if you use the product correctly.
Beyond that, you need to consider whether to save or invest your LISA. There are two versions of the LISA: cash and stocks and shares. Given how long it is taking to get on the housing ladder, it’s understandable more LISA customers are opting for the stocks and shares version, effectively deciding that it’s worth taking a greater risk to build their deposit sooner and more impressively. But as investing is risky, this is not something to go into lightly. I write a whole chapter in the book about how to weigh up this decision.
You previously mentioned financial hurdles the younger generation has to navigate. What opportunities are available to this generation that perhaps wouldn’t have been available for generations previously?
The growth of passive investing in recent times has really helped to challenge the dominance of murky, high-cost active funds in the UK. The evidence is pretty clear that only a minority of active funds outperform the market, though conditions could change in the coming years and end up favouring those who have a more thoughtful, cherry-picked portfolio. Nonetheless, active managers have charged too much for too long for too little, so the emergence of exchange-traded funds and other low-cost investment vehicles is mostly a positive.
Also, big investing platforms have tended to have it all their own way, and they have come with lots of expensive strings attached. Smaller trading platforms offering ‘free’ trading are making investing much easier for younger people, though investors need to be aware of what these models offer and what they’re losing as well as gaining – the chance to invest in real-time and access all the companies/funds in the market, for instance. Nonetheless, I think we’ve got far more choice than was previously the case, and this encourages everybody in the business to up their game.
To hear more from Iona you can get 25% off her brand new book plus free UK delivery with code MONEYHUB25 entered at the checkout stage here.
About Iona: In 2011, Iona Bain established The Young Money Blog, a first of its kind blog dedicated to empowering the younger generation to seize control of their personal finance.
Since then, Iona has enjoyed an exciting career as an award winning speaker, broadcaster, writer and has recently published ‘Own It - How our Generation can Invest Our Way to a Better Future’. You can find out more about Iona and The Young Money Blog, here.