The benefits of being an early bird
Sometimes waiting until the last minute to get things done is a reality of modern day busy living. Most of the time you can get away with it and no harm is done, but unfortunately the fates are not always kind. One job that often gets left to the eleventh hour is making use of the annual ISA allowance by investing in a cash ISA, a Stocks and Shares ISA or the Innovative Finance ISA.
Here we take a look at why starting early in the tax year can make a big difference to your investment returns.
Get on the starting blocks so you’re ready to win
One thing is for sure, if you aren’t on the starting block when the whistle blows you’re never going to win the race.
And the same applies to investing. If you aren’t ready to invest as soon as the new tax year begins and your new allowance kicks in (£20,000 for the 2018/19 tax year), you may miss out on the best investment deals.
Waiting until the end of the tax year to invest means you’ll only be able to pick from amongst the investment deals on the market at that time.
If you’re ready to invest from the get-go then you can pick your moment and pick the best investment for your needs.
Invest regularly to diversify risk
Diversifying risk is key to becoming a better investor by ensuring you are creating a solid investment portfolio.
To assess your own risk tolerance, you need to take a proper look at what your financial commitments are, and how you need your investments to deliver over the short, medium and long term. Lastly you need to be very clear about how much money you can afford to risk if the worst should happen.
A properly balanced portfolio will include lower risk investments that will generally only offer lower rates of return, such as cash ISAs. As well as some higher risk investments which can offer much higher returns. The proportions of each will depend on your personal circumstances.
Making use of your ISA allowance to make investments is a great way to boost the levels of returns you are getting across your portfolio. But you’ll only really be maintaining optimum risk balance if you invest your ISA across the tax year instead of just at the end. This is because you will be able to pick and choose a greater variety of investment opportunities.
Look after the pennies and pounds look after themselves
If you are able to fund your ISA contribution at the beginning or set up monthly or quarterly ISA contributions, the pay-back can be well worth it.
If you invest your 2018/19 £20,000 allowance three days before the end of the tax year, you’re only going to benefit from a fraction of that particular year’s annual returns and the associated tax benefits.
However, if you can invest £5,000 every three months, across the year, you will be benefit from nine months-worth of annual returns on the first lump sum, six on the next, and three on the next.
Let’s look at a real life example, if you invested £5000 at a 6% per annum interest rate and did this at regular intervals four times over the course of a tax year, your money would grow by nearly twice as much compared to if you invested your full £20,000 2018/19 allowance in the three months leading up to the end of the tax year.*
It seems obvious, but many people still wait and cost themselves these extra returns.
Rid yourself of investment panic – get organised
Investing at the end of the tax year is better than not investing at all if you really can’t spare the money during the year.
But if you can invest in an ISA early or either with monthly or quarterly instalments you can potentially make your money work harder, and save yourself a lot of last minute panic.
*Calculations based on an investment offering 6% per annum returns with £5000 invested at the start of each quarter in one tax year versus £20,000 invested at the start of the fourth quarter.