Seven steps to build your own ‘Starter ISA’

If you want to get people investing and growing their wealth, the government has finally concluded that a carrot will be far more effective than a stick.

In his maiden Budget, the new chancellor, John Healey, confirmed that the £12,000 cap on cash individual savings accounts (ISA) for under 65s, announced by his predecessor Rachel Reeves a year earlier, would be scrapped.

Putting a cap, after all, on the number of biscuits you can eat, doesn’t encourage you to eat more vegetables.

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There was no guarantee that savers would invest surplus cash in the stock market. More likely they’d just (reluctantly) pay more tax on savings interest.

Instead, Healey announced plans for a new ISA (yes, another one), although this is expected to act as a carve out within the stocks and shares version rather than a standalone product. Working in conjunction with the investment industry, the new product would “reward first-time investors”.

There was no detail about what the incentive would be. One suggestion put forward by consumer champion Martin Lewis was a 10% top-up on the first £2,000 invested.

There also wasn’t any indication of what constitutes a “first-time investor”. But the idea itself makes sense. 

Analysis from Barclays has highlighted that there’s 15 million adults in the UK, with over £610 billion in cash that they could afford to invest.

And, in sticking with low-interest savings accounts, they’re missing out on the opportunity to really grow their money over time.

The problem is that investing is often regarded as complicated and riskier than it needs to be – especially when you’ve got your cash needs covered and can afford to leave your investments to “do their thing”.

But investing can – if you let it – be incredibly simple. And you don’t need to wait for a new starter ISA to get your money to worker harder and begin your investing journey.

Seven steps to kickstart your ISA investing journey

1) Can you afford to invest?

The first step is to work out if you’re ready to invest by answering three simple questions:

• Do you have any debts like credit cards or personal loans? You don’t need to factor in mortgages or student loans
• Do you have three to six months’ expenses in cash savings?
• Can you afford to tie your money up for at least five years?

If you haven’t got expensive debts, have enough cash to get by in an emergency, and you won’t need to call on your investments for at least five years, think about investing.

2) Find a home for your investments

For most new investors, a stocks and shares ISA is the best place to start. Unlike trading or general investment accounts (GIA), your money will be sheltered from tax as it grows and when you make withdrawals.

You can invest £20,000 a year into ISAs and access your money whenever you wish.

Stocks and shares ISAs are available from investment platforms like interactive investor that give you access to a wide range of different investment types (including shares and funds). If you choose a platform with a flat fee, like ii, your charges won’t go up as the value of your investments rise.

3) Set a goal

It helps to think about why you want to invest? Is it just to give yourself a financial safety cushion, or do you have something specific in mind like saving for a property or funding a child’s education?

Setting a goal gives your investment a purpose, keeps you accountable and can be helpful in guiding where and how you invest.

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4) Think about risk

Before you choose any investments, take the time to think about risk, that is, your willingness and capacity for loss.

Risk is highly personal and you don’t want to invest money in something that will give you sleepless nights. But it shouldn’t just be an emotionally-led decision; it helps if you can be pragmatic.

The prospect of losing money can be scary, but counter that by thinking about the risk of leaving your cash in a low-interest account and not achieving your financial goals.

As a guide, the longer you have until you need your money, the more risk you can take. That’s because you’ve got more time to ride out the inevitable ups and downs of investing.

If you’re doing research on your chosen platform, it helps to look at performance graphs.

Look at what’s happened to a specific fund, or an index like the FTSE 100, over the last few weeks and months and it will often look like a bumpy ride. But if you zoom out to look at its performance over the last few years, the ups and downs will be smoothed out and you’ll hopefully be able to see that the general trajectory is upwards.

According to the Barclays Equity Gilt study, over a 10-year period, there’s a 91% chance that an investment in stocks and shares will beat cash.

5) Choose your investments

Diversification is important for investors as it spreads risk. But you don’t have to build a complicated share portfolio.

By investing in funds, you’ll get exposure to a broad portfolio of shares that’s managed for you.

A well-diversified global fund is an excellent starting point. Exchange-traded funds (ETFs) are another option. These low-cost funds are traded on the stock market and give you access to a basket of shares. Often they will track popular indices like the FTSE 100 or the S&P 500 in the US.

If you’re more cautious, multi-asset funds split money between equities and bonds (like corporate bonds or gilts) to reduce risk.

Some platforms also offer ready-made or managed portfolios, which is helpful if you want to keep decisions to a minimum. These give you access to a portfolio of funds that matches your attitude to risk.

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You can invest in individual shares, but it’s much higher risk as it takes time and skill to pick the winners – funds (and other collective investments) let you spread your bets.

6) Lump sum or regular investment?

If you’ve got money languishing in savings accounts, you could pay in a lump sum.

But if you’re nervous, it may make more sense to dip a toe in by setting up a regular investing plan and making smaller monthly contributions. This reduces the risk of a quick loss if markets fall and means you get to take advantage of so-called pound-cost averaging as you’ll have paid the average price for your shares over time (rather than buying at the top or bottom).

With payments scheduled every month, it also reduces the temptation to try and time the market.

ii is one of the platforms that provides a free regular investing service.

7) Press the button

Even when you’re starting out, there’s a few decisions to make, like choosing a platform and picking investments, but it’s important not to let pressure to make the “perfect” decision put you off.

The key is to get started. So long as your decisions aren’t entirely reckless, it won’t matter if your chosen investment isn’t the best performer or the cheapest – you should still make money over time.

Learning is all part of the journey and you can always make changes as you go along.

In time, you might get the investment bug and take a greater interest in running your portfolio – for example buying individual shares and trading more frequently.

But there’s no requirement to become personally “invested” or actively involved. So long as you check in on your portfolio once or twice a year, your money can still work hard when you’re hands off.