The Salary Calculator

When each day the headlines regarding the economy are worse than the last, warnings of skyrocketing energy prices, excessive food and petrol costs, and forecasts that it’s only going to get worse, you may be counting every penny. Investing is likely to be the last thing on your mind when juggling your finances in this challenging financial crisis.

That’s what the research shows, too. According to one study, 24% have stopped contributing to investments and savings because of the cost of living crisis. Meanwhile, 14.1% of British households don’t hold any investment, even though most have at least six months’ worth of “essential spending cash.”

That said, experts say that it’s perhaps not the best plan to abandon ship and that continuing to invest might actually benefit you in the long run.

At The Salary Calculator, we’ll walk you through:

• Whether not you should continue investing during the cost of living crisis
• What are the risks and how can you safeguard yourself
• How you should invest

Should you invest?

People are indeed becoming more cautious around investment, however, Becky O’Connor, head of pensions and savings at Interactive Investor says some are still making regular contributions. However, O’Connor explained that it’s “understandable” that people are more reluctant to part ways with their money and expose it to risk, “given the current outlook for household budgets” that people are “looking to make cutbacks wherever they can.”

As a result, research from Scottish Friendly reveals that investment levels have fallen to their lowest in three years in the second quarter of the year. This figure stands alongside the total value of new adult investment ISA policies, which has dropped 6%.

Explaining the reason for this decline, Simon Phillips, an independent financial adviser and partner at Devon-based Continuum, said: “Cash is not making anything due to inflation, but many people tend to think that if the economy is struggling or the stockmarket is volatile, that they should cut back on stocks and shares and keep money safe in cash.” However, Phillips argues that from a financial point of view, that approach is the “worst thing you can do” because it means you will miss out on investing at “what could be a good time from an equity standpoint.”

Sarah Coles echoes similar sentiments when discussing future savings:: “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. A few months away from a pension isn’t going to make a dramatic difference to your retirement, but if it drags on and you don’t have a plan for beefing payments up again when your finances ease, then you could end up with a horrible surprise in retirement.”

According to the experts, if you have built up a robust emergency fund to ensure that you have security when the hard times come, it could be beneficial for you to explore investment.

What are the risks and how should you safeguard yourself?

One of the main barriers to people diving into the world of investment is that many don’t feel confident exploring that space. For many, there’s the misconception that investment is only for people with lots of money. This perhaps explains why 46% of people don’t feel confident when it comes to investing.

It is certainly true that investment comes with risks. After all, if the stock markets blossom, so will the value of your investment, and vice versa, if the markets crash, your investments could take a hit. Not all investments are created equal though, and some pose more risks than others. According to the experts, government bonds are considered less risky, but will return less profit, meanwhile, shares are riskier, as are trusts and cryptocurrency, the latter of which is becoming increasingly popular, but also incredibly volatile.

When it comes to minimising risk, diversification is an essential component, while Barclays recommends investing globally to get access to a range of economies. It’s also suggested that when thinking about investment, you consider the long-term implications and you only invest funds you don’t need across the next five years. It’s also important that you review your investment portfolio regularly to make sure that you’re meeting your goals and not exposing yourself to risk.

Tips for how you should invest?

When considering investing, it’s important that you put the research in, and make sure you pick the right options for you, your financial situation, and take into account the level of risk you are willing to expose yourself to.

In a cost of living crisis, some recommend that investing in defensive stocks, which include “essential goods and services,” can be a good option, as they often outperform the market, when there are financially difficult times. Likewise, dividend stocks can also generate funds quickly.

Guidance from finance experts also suggests that you should drip-feed your money into investments, which can reportedly help you benefit from pound-cost averaging. It’s also important to note that when the economy looks grim, you are also more likely to be able to buy low-priced stocks.