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Should you invest during a cost-of-living crisis?

We look at if you should think about investing and saving into a pension, even during a cost-of-living crisis.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

If you’re feeling the effects of the cost-of-living crisis, you’re not alone. The main concern for lots of us will be how far our pockets can stretch to cover the everyday essentials.

But that doesn’t mean we should forget about our pension savings and investments. Especially for those who might be thinking about selling their investments to cover rising costs.

You might not be in a place to think about this today, but saving into a pension and investing are two key pillars to improving your overall financial security. So unless you’re facing problem debts or have little to no cash savings, even with budgets tightening, you should try not to dismiss the benefits of them for your future.

If you happen to have a bit of spare cash at the end of the month, here are some things to think about.

This article should help you with your approach to saving and investing, but it isn’t personal advice. If you’re not sure what to do, ask for financial advice.

Why investing can benefit you in the long term

An investment strategy can be key to improving long-term financial resilience – we invest to make our money work that little bit harder.

Investing in the stock market is often deemed high risk, and it can be. It’s riskier than just holding cash, but that’s not going to get you very far, especially with inflation as high as it is. Blaring headlines about big stock market falls don’t help either. But in reality, while riskier, investing can offer an opportunity to grow your wealth and help beat inflation over the long term.

Investing in the stock market has historically often been the best long-term option to help avoid inflation eroding the value of your money.

The value of investments goes up and down, so while you could make a profit, you could also get back less than you put in. This can be particularly true in the short term. You shouldn’t invest money you’re likely to need within the next five years.

Although it might not seem this way at the moment, inflation like we’ve seen recently won’t be here forever. It’s important to try and shelter the value of our portfolios as much as we can in the meantime using tools like diversification.

Investing doesn’t need to be done by starting with a large lump sum of money either. You can add to an investment portfolio in smaller chunks on a monthly basis, giving you a better chance of riding out the ups and downs of the market. This is called pound-cost averaging.

What is pound-cost averaging and how does it work?

When you make regular contributions to your investments, you benefit from pound-cost averaging.

Rather than investing once with a lump sum, investing regularly will help to shelter you against market volatility. It can help smooth out market fluctuations and ‘average-out’ the price paid for your investments.

This means the share or unit price going up and down can actually benefit you. That’s because you naturally buy fewer shares or units when prices are high and more shares or units when prices are low. In theory, this should help even out the average cost you pay.

It’s worth pointing out though, stock markets don’t always harmonize with theories. This approach could work against you if prices rise and never look back – investors could be better served by investing a lump sum in this scenario.

But we know markets move up and down in the near term. The law of averages would suggest investing monthly should even things out over time.

In a time when prices are rising and our hard-earned cash is being stretched, adding little and often can help to take the pressure off.

Learn more about regular investing

The power of compounding

Compounding can supercharge your returns, as long as you’re investing for the long term.

It’s when any interest you earn on your savings or dividends you earn on your investments are reinvested, earning you more returns – your returns are earning returns.

Let’s say you’d invested £10,000 and it returns 2% income after one year. That’ll be £200 added to your investment pot.

In the following year, as well as earning returns on your original £10,000, you also earn on the £200.

If you returned another 2% in the second year, your investment of £10,200 would grow by £204 of income the next year, giving a total of £10,404.

The same logic applies to all the years after, so your money could grow at a faster rate by staying invested.

These figures are an illustration and actual returns depend on individual investments chosen and of course there are no guarantees.

If you do cut back on saving for the future when money is tight, it’s worth considering when you’ll be able to bump contributions back up.

Learn more about long-term investing

Should you pay into a pension?

Retirement might feel like a long way away, but it’s never too early to start contributing to a pension.

If you’re between 22 and state pension age, employed and earning more than £10,000 a year, you should be auto enrolled into a workplace pension. You’ll make monthly contributions straight from your pay cheque.

At a time when your day-to-day costs are going up, it could be tempting to suspend these contributions, but there are lots of reasons to keep them going if you can.

The contribution you make to your pension gets a boost from the government, as well as your employer.

The government boost is in the form of pension tax relief. For every £80 put into your pension, the government will top it up to £100. If you’re a higher or additional-rate taxpayer, you can also claim up to £20 or £25 in further tax relief. Different tax rates and bands apply to Scottish taxpayers.

Your employer will also contribute at least 3% of your qualifying earnings or pensionable pay. In lots of cases, they’ll pay more.

Over time these extra boosts can make a huge difference to how much goes into your pension, which is typically invested in the stock market. In the long run, these contributions will grow as they benefit from any growth in the investments. Remember, investments can go down as well as up in value, so you could get back less than you invest.

If you really do need to stop or cut back contributions because of other financial pressures, then it’s important to re-start them as soon as possible.

You can usually access your pension from age 55 (rising to 57 in 2028).

Are you in a place to think about investing and saving into a pension?

The cost-of-living crisis has impacted everyone, and it seems like it will continue to do so for a while, effecting our overall financial resilience.

We think there are five key building blocks to help you prepare for the unexpected and secure your financial future – the 5 to Thrive.

This includes controlling your debt, protecting you and your loved ones with the right protection, having an emergency cash buffer, saving into a pension, and investing to make more of your money.

This is in order of priority, so make sure you have the initial building blocks well covered before you start, or top up, your investment portfolio.

More on the 5 key building blocks for financial resilience

If you’re not sure how your financial resilience shapes up compared to other households like yours, try our savings and resilience comparison tool.

Savings and resilience comparison tool

Help out there to deal with the cost-of-living crisis

If you, or someone you know, want some extra support with your finances, there are plenty of organisations out there offering help. Here are a few good places to start.

MoneyHelper offer free and impartial guidance on all areas of financial resilience. One way to keep on top of your finances is through budgeting. You could try their budget planner to record and breakdown all your spending, and get some personalised tips along the way.

If you’re worried about your debts, StepChange provide free, confidential debt advice. They’ll look at the best solution for your circumstances and support you while you deal with your money troubles.

Find out more about MoneyHelper

Find out more about StepChange

Find out more about controlling your debt

What did you think of this article?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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