Kully Sumra, client relationship director at online investment manager Nutmeg, gave his advice on investing your hard-earned cash on the Freelance Corner podcast.
Listen to the podcast here:
Is investing a good idea for freelancers?
In the freelance world, managing your money properly is often deemed a lifeline for your business. Savings, investments, pensions, stocks, shares – words often thrown about as essentials for your self-employment survival toolkit. Yet, all too often these terms are shrouded in complexity in the interests of those in the industry. Here is a breakdown of how you can make the best of some of these tools and invest to your advantage.
Cash vs stocks and shares
A cash ISA works like a normal savings account – you earn interest on deposited savings. The returns on cash savings are modest at best: often, the interest rate doesn’t keep pace with the rate of inflation, meaning the real value of your cash could decrease. However, the benefit of saving with a cash ISA is the low level of risk involved.
Stocks and shares investing, on the other hand, comes with bigger risk but potentially much greater reward. You could get a higher return on your money than you would using a cash ISA, and you are more likely to stay ahead of the inflation rate. However, you could lose capital if there is a downturn in the market.
You have two options here: self-directed investing or using an investment manager. If you are self-directing your investments, you decide which stocks and shares to buy. However, is this the smart way to invest? Freelancers must wear so many hats as it is: accountant, salesperson, HR manager. Do you have the time to monitor your own money as well?
A safer choice may be to invest through a wealth manager such as Nutmeg. Using their services, your money would be actively monitored and managed in line with your risk preferences. Outsourcing this task, especially if you are a beginner to investing, could be the best option. Of course, you could always do both: many expert investors also use Nutmeg to help with safe management of their money.
Establishing your appetite for risk is crucial before investing. To be clear, your capital is always at risk when you invest. However, there are ways that these risks can be managed. Diversifying investments to minimise being adversely affected by market downturns is one method. An investment manager can do this for you. Nutmeg have built a range of investment portfolios to suit customers looking for different risk levels.
It’s also important to get the timing right. Don’t throw all of your money into the market in one go. Implement pound-cost averaging into your strategy: rather than investing a large amount at once, split the capital over a period of time. This is an especially important tip for freelancers given how uncertain income patterns can be.
How much to invest
There is no one-size-fits-all answer to this. However, one technique to test out is using the 50/30/20 savings rule. 50 per cent of your post-tax income is reserved for necessities (rent, mortgage repayments, bills, utilities), 30 per cent for lifestyle choices (gym, holiday, restaurants), and 20% for getting ahead.
This 20% might be made up of pension contributions, debt payments, and saving or investing. Let’s say you have 10% left for the latter category. If you stow away this capital over time, you could be really surprised at how much can be built up.
Is now the right time to invest?
Judging timing in the market is always a challenge. There is an old adage in finance: time in the market is more important than timing the market. If you time the market you have to get it right twice, buying shares on the downturn then selling them at the top. Staying in the market is often the best option and is what many Nutmeg customers have done during the coronavirus pandemic.
If you are thinking about investing, now could be a good time to get clarity on your personal finances to inform your decision over what level of risk you are willing to accept.
With a Freelance Corner pack, you have access to a great discount when you join Nutmeg.