“This is the year ordinary people discovered financial markets”, one journalist penned in November 2021. Since the break of the pandemic, a record number of new investors have flooded the scene.

But despite this increased interest, just 3% of the overall adult population have a Stocks & Shares ISA – an extremely tax-efficient and simple way to invest. This begs the question, why not more? It’s something Triodos Bank is keen to encourage, especially as investing through the bank’s impact investment funds also helps to support businesses aiming to have a positive impact on people and planet.

However, for anyone considering investing there are five questions they should ask before they embark on their journey. While this article is intended to be helpful, it is not advice. Please be aware that with investing comes risk, and there is a chance that you may get back less than you put in.

1. Would it be better to pay off debt first?

Yes, ideally, pay close attention to any early repayment fees, as well as the interest rates to make an informed decision. As of December 2021, average credit card interest rates exploded to over 21% - the highest since 1998. And for people with low credit scores, the Annual Percentage Rate (APR) can be as high as 59%.

Generally, when it comes to credit card repayments and payday loans, it’s better to pay them off before investing otherwise any gains (although these aren’t guaranteed) made through investing could just be absorbed by debt.

2. Should I have a ‘rainy day’ pot of money?

Definitely! Experts recommend saving enough to cover three to six months of living expenses (such as money for mortgage/rent, bills, food, travel, and any other essential monthly outgoings), before investing. For the average UK household, this comes to £2,548 each month. So, a guideline could be (depending on age and circumstance) between £7,644 and £15,288. Any more, and this money is at risk of inflation eroding its value over time. But any less, people could find themselves in a difficult financial situation if an emergency happens.

Importantly, a ‘rainy day’ pot can enhance mental wellbeing too. Two in five Brits today are stressed about money, and a staggering one in five can’t sleep because of it. So, for peace of mind alone this could be worthwhile.

3. How long should I invest for?

Before making any decisions, investors should consider how long they can afford to keep their money tied-up for. This should shape any decision and their portfolio. Generally speaking, someone investing for retirement in 30 years could have more stocks and shares in their portfolio than someone aiming to buy a home in six years. 

However, first-time investors should also avoid short-term speculation as all investments are designed to be held for the long-term. Today, UK financial regulator, the FCA, is concerned about the floods of novice crypto traders pouring (and sometimes losing) all their savings into digital assets. What’s more, the average investment time frame has dipped to a risky 0.8 years, compared to 9.7 in 1980. Ideally, timeframes should be at least five years, and a mix of investments (bonds and equity) as this helps to spread the risk.

4. What level of risk is right for me?

Different investments come with different levels of risk.

Firstly, corporate and government bonds tend to be less risky than shares (equity), but the potential returns are lower too. Known as the ‘risk/return trade-off’, investors usually try to find the balance of potential financial return, against the amount of risk they’re willing to take, and with the bank’s investors the impact they want to help achieve. While investing in sustainable innovation companies may be riskier, it has a greater potential for return and will deliver more impact. Overall, your capital is always at risk when investing, so research is key in judging what’s right for you.

Secondly, some people think impact investments are riskier than traditional investments. But many argue that view is outdated. Companies within the Triodos Impact Investment funds are chosen if they’re aligned to some or all of seven sustainable transition themes. Some are large, global entities from the FTSE 100 – Vodafone, DS Smith, United Utilities Group or RELX PLC. Others are still listed - most are innovators in sustainability, but still robust and profitable companies. Their progress is constantly monitored, and the funds are actively managed.

Finally, sustainable investments tend to be less volatile than traditional investments – meaning the price doesn’t dip and soar as much. And very importantly, they are less likely to become stranded assets - which are investments deemed to be very reliable and low risk, but nevertheless plummeted - like mining for coal. Therefore, it could be argued sustainable companies superseding these industries have greater long-term potential while contributing to lower carbon emissions and addressing societal challenges.

5. How can I make my investments tax-efficient?

As well as making money, first-time investors should also think about how to protect any profits from tax. The easiest way to do this is by opting for a tax-efficient investment portfolio. This means keeping more of their money, which can compound and add up over time. One of the best ways is through an Individual Savings Account, or “ISA”. 

A Stocks and Shares ISA is known as a tax-wrapper because it shields investments from certain taxes up to £20,000 per year. So, over five years, that’s £100,000 of investments entirely tax-free. It doesn’t cost any more to invest via a Triodos Stocks & Shares ISA, so these benefits come for free. There are some golden rules investors will need to be aware of as they set up their ISA, but overall, it’s an easy and tax-efficient way to make your money work harder.