Why it pays to be an early bird with investment

With many newspapers and online articles talking about final deadlines, it would be easy to assume that it is best to leave using these allowances until the very last minute. The truth is, though, that with investment, the early bird often catches the worm.

It’s time in the market that counts

If you’ve ever studied the miracle that is compounding, you’ll know that the snowball effect (growth upon growth) is what really turbocharges your investments over time. The longer that our money has to grow, the better it is for us, so starting to invest money at the beginning of the financial year, rather than waiting until the end will make a difference.

That difference could be stark. If you invested the maximum ISA allowance of £20,000 at the start of each tax year on April 6, and it made five per cent return after charges, you would have a portfolio worth £264,135. Leave it until the end of each tax year, and you’d have £251,5551.

Regular investment pays dividends

Even if you cannot afford to put £20,000 in at the beginning of the tax year, making regular payments every month towards the target could ensure you end up with a better final outcome. It also lessens the issue that you might accidentally put in a large amount of money just before a crash in the market, instead ensuring that you drip feed it in over time, smoothing out the natural ups and downs in investing.

If you automatically reinvest the profits of the dividends you are paid on your investments, you’ll find that your money grows even more quickly.

What about your pension?

If you are able to pay extra into your pension, the same principle applies. The earlier in the tax year you can start making contributions, the better, as the money has more time to grow.

Thinking even earlier

While getting your investments in at the beginning of the year is a winning strategy, really long-term investors can benefit even more by investing early for the long term.

Products such as Junior Isas, for children, and pensions for both children and adults, allow you to make the most of this strategy. If you open a Junior Isa for a child, you know that it will be 18 years before they will be able to use the money, giving it plenty of time to grow in the meantime, and meaning that you can be braver with your investment strategies, knowing that there will be time for any dips in the market to be rectified and for dividends to be reinvested.

Pensions also have a very long timeframe. Opening a pension for a child is a real example of an early bird strategy. They won’t be able to use the money until they are in their sixties, but you can still benefit from a government contribution to their pension pot as well as from time for the money to grow.

Despite the fact that most children do not have a taxable income, the state will still top up parental contributions of up to £2,880 a year into a Self Invested Personal Pension (SIPP). That means that every year the government will put £720 towards your child’s retirement.

Even if the time when they need a pension is a long way off, adopting this strategy early on may mean that they need to divert less of their own income into pensions in their early adult lives, so you will be relieving their financial pressure from a younger age.

Make a resolution

As we enter a new tax year, with new annual allowances for many types of investment, making a resolution not to leave investment until the last minute could pay dividends.

With the future looking far from certain, setting up regular savings plans today should help ensure you aren’t panicking at the end of March 2023 to make the most of your money.

1 https://www.abrdn.com/en-gb/individual/digital-investing/guides-and-tools/isa-calculator