How to start your ISA journey in 5 easy steps

If you’ve never invested in an ISA before, this article will help put you on the right path to start your investment journey. Equally, if you’re already putting money into the markets, keep reading as there might a few pointers that could help sharpen your approach.

First let’s deal with what it is. ISA stands for individual savings account and it’s a way to save or invest and without the taxman getting at your gains. There is no tax to pay on any growth in the value of your savings and investments or on any income in the account. We’ll explain in a second how much you can put in each year.

STEP ONE: Establish what you want to achieve

Having a clear goal from the start can be a good incentive to work hard to hit that target. Think how you might want to do more exercise and change your diet to improve your health and become stronger. That journey can take time, but the rewards can be terrific down the line.

Putting money into an ISA is a similar process. It takes time, hard work and focus to develop and sustain a regular investing habit, and you may not necessarily see the results immediately.

There are many different reasons why someone would want to invest. You might want to buy your first home and need to save up for a deposit. If you own a property, you might want to put money to work in an ISA to fund an extension or a loft conversion.

Paying for a wedding, covering your children’s school or university fees, going on a dream holiday – these are all popular investment goals. And, of course, there is the big one – putting money away for retirement and you might want an ISA as well as or instead of a pension. But which ISA is right for you?

A lot of people have a specific monetary goal, such as to hit £30,000 within five years. But there is nothing wrong with just saying you want a bigger pot in the future and trying to squirrel away as much money as possible in your ISA as you go along.

Admittedly, there can be an advantage in having a specific time horizon as that could help establish if investing is right for you. For example, someone hoping to buy a house in two years’ time might find that investing doesn’t suit their needs.

Just imagine if the stock market went through a bad patch in those two years as you may not have enough time for the market to recover before you need that money.

However, if your goal is to achieve something on a longer time horizon of at least three years, then you would hopefully have time to ride out any ups and downs on the market, and investing could be for you.

STEP TWO: Work out how much you can invest on a regular basis

It’s important to get your finances in order so you know how much you can afford to invest.

Create a budget – look at how much money is coming into your bank account each month and then see what’s going out to pay for bills, food and other items. What’s left is the starting point for deciding how much you can put in your ISA each month.

First, you need to think about paying off any expensive debt such as a personal loan or a credit card where the interest rate is high, such as in double-digits. You also need to make sure you’ve got a rainy-day pot of cash that can cover any emergencies. Once sorted, work out how much money can be allocated to investments.

STEP THREE: Fund your ISA

It’s now time to put money into your account. You can either invest a lump sum or make regular contributions.

One way to make life easier is to set up a direct debit so money is automatically transferred from your bank account to your ISA on the same day each month.

But before you put any money into your account, you must consider the annual allowances for ISAs, particularly if you’re investing a lump sum and have quite a bit of money, perhaps inherited from someone in your family.

Each tax year, you can put up to £20,000 across the range of adult ISAs but you’re only allowed to put up to £4,000 into a Lifetime ISA. For example, you could put £4,000 in a Lifetime ISA and then put up to £16,000 into other ISA types such as a Stocks and shares ISA and a Cash ISA in a single tax year.

If you take money out of an ISA and then put some of it back into your account in the same tax year, the taxman will treat that latter payment as a new contribution of money, so it will count towards your ISA allowance again unless you have a flexible ISA.

It’s also important to note that Lifetime ISAs have a 25% exit penalty charge if you withdraw money before age 60 for any reason apart from using it towards buying a first home or if you’re terminally ill.

STEP FOUR: Choose your investments

The next stage is to work out where you want your money invested.

Before you make your selection, have a think about the type of investments you’d be happy to own. Some people feel fine putting money into higher risk areas in the hope they get higher returns. Others are more cautious and don’t want to wake up in the night worried if their shares or funds have slumped in value.

Investments go up and down in value so you need to be comfortable with prices fluctuating on a daily basis. But if something like a 20% loss over a month causes you a lot of stress, you might need to switch into lower-risk investments or consider if investing is right for you at all.

Fund information documents contain a risk rating which can help you determine if that product is higher or lower risk. But this information isn’t available for individual company shares so you’ll need to think about the type of industry they operate in.

For example, a biotech company is likely to be considered high risk because it is trying to come up with new drugs and treatments and the success rate is unpredictable. A supermarket is generally considered to be lower risk because we all need to buy food and drink no matter what’s going on in the world, although it isn’t risk-free because you need to consider competition from other grocery providers, the state of its finances, and other factors.

The beauty of ISAs is that they can hold a wide variety of shares, funds, investment trusts and bonds. You can choose from thousands of well-known companies and lesser-known ones.

There are funds investing in certain industries or parts of the world, and even ones that play into specific themes like artificial intelligence or companies that pay generous dividends. Funds are popular among first-time investors because they typically provide instant diversification. They will invest in a portfolio of different assets such as company shares or bonds.

I like to compare funds to a box of assorted biscuits. You get different flavours, shapes and sizes all inside a single investment. Essentially you are spreading your risks with a fund– if something goes wrong with one of the companies or bonds in its portfolio, you have all the other holdings to act as a cushion and hopefully minimise the damage. You can find plenty more information about the different kinds of investments here.

STEP FIVE: Hit the ‘buy’ button

The final stage is to place your order. If you want to buy shares, ETFs or investment trusts, you input how much you want to invest or the quantity of shares and then request a quote. You’re given a price which is valid for 15 seconds – you either accept the quote or let it expire. Prices are constantly moving on the stock market which is why this quote system is in place across all investment platforms.

With funds, you place an order and it can take a day or two for the transaction to complete. Funds are only priced once a day so you don’t get the 15-second countdown you find with shares, ETFs and investment trust. Once you’ve completed your transaction, there is an option to automatically reinvest any dividends or to set up a regular investing service where you put the same amount of money into the same thing each month. These can make your life a lot easier. Find out more about regular investing.

Ready to begin your ISA journey?

Get started with an AJ Bell ISA today