Five steps to financial happiness

1. Stocks beat cash

Climbing the career ladder is rewarding, both from a personal and financial perspective.

Extra money in your pocket from pay rises may tempt you to buy a new TV or put a bit of cash away for a rainy day. That’s fine for the short-term, but will it make you rich?

It is never too early to start thinking about investing money in an attempt to build up a pot of money to help you in later life. A Stocks and Shares ISA, which wraps around your investments to keep them out of reach of the taxman, is the perfect vehicle.

You can invest up to an annual allowance of £15,240 and over time shares have historically delivered much better returns than cash on deposit.

The annual Barclays Equity Gilt Study* shows that over the last 50 years – once the impact of inflation is stripped out – stocks and shares have delivered a return of 5.7% compared with a return of just 1.5% from cash.

It is also worth bearing in mind that the historic returns from cash were achieved through periods when rates were a lot higher than they are now.

Click here to find out more how to open a Stocks and Shares ISA

2. Accumulated tax savings can be big

Over time the savings associated with sheltering your investments in an ISA can be significant.

You pay no capital gains tax (18% or 28% outside an ISA depending on your circumstances) or income tax on funds held within an ISA.

There is the potential to really tap the wealth-generating power of the stock market by reinvesting dividends from company shares and funds that pay these cash rewards.

The FTSE All-Share has generated an average annual total return of 11.4% since its inception in 1962, made up of a 7.1% annual capital growth rate and an average 4.3% dividend yield.

The inflation-busting power of shares is neatly illustrated when you consider a £39,746 investment today will be worth £1,000,000 in 30 years’ time with dividends reinvested, assuming an 11.4% annual rate of return can be sustained. This isn’t guaranteed to happen, but history tells us that the stock market wins over cash when you invest for at least five to seven years.

The compounding effect is achieved by reinvesting dividends and accounts for about two-thirds of this 25-fold gain.** Please note that the figures exclude the fees you would pay to buy and hold investments.

3. ISAs are simple

You can open a Stocks and Shares ISA with AJ Bell Youinvest in minutes online.

You will need to invest a minimum of £500 to open an ISA but can make regular payments of as little as £25 per month after that.

If you are not sure about individual stock selections you can invest in funds where a professional makes the investment decisions for you. The fund manager will charge an annual management fee for this service, typically 1.5%.

Investing isn’t guaranteed to give you a profit on your capital and your money can go down in value as well as go up. It is therefore important to understand the risks that go with using a stocks and shares ISA.

4. ISAs are accessible

Unlike a pension which you cannot access until you reach 55, you can access the funds within your ISA at any time to meet the costs of an unexpected expense, school fees or the holiday of a lifetime.

With an AJ Bell Youinvest Stocks and Shares ISA, the funds should be in a nominated bank account within five working days. Remember: once money has been taken out of the ISA it cannot be paid back if you have already reached your annual ISA allowance for the current tax year.

Click here to find out more how to open a Stocks and Shares ISA

5. ISAs are flexible

You can use an ISA to buy and sell a wide range of permitted investments including UK and overseas shares, funds and bonds.

A new Innovative Finance ISA will allow you to access peer-to-peer loans from April 2016 and the list of qualifying investments for the new ISA wrapper will be extended in autumn 2016 to include debt securities offered via crowdfunding platforms.

Please note that not all ISA providers will offer the Innovative Finance wrapper.

PLEASE NOTE: AJ Bell charge a fee for each transaction (between £1.50 and £9.95 for online deals).

Click here to find out more how to open a Stocks and Shares ISA

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Please note the value of investments, and any income from them can go down as well as up and you may not get back your original investment. We do not offer advice about the suitability of our products or any investments held within them. Should you require financial advice you should consult a suitably qualified financial adviser. Tax rules can change in the future and the tax treatment depends on your personal circumstances. Past performance is not a guide to future performance and some investments need to be held for the long term.

AJ Bell is authorised and regulated by the Financial Conduct Authority. The Independent is not responsible for the content of this advertisement feature and any queries should be directed to AJ Bell.