How to tell if you should invest your money

Millions of British households have fallen into the investment gap, missing out on the chance to let investments do some of the heavy lifting in building their long-term finances.

The new Hargreaves Lansdown Savings & Resilience Barometer has revealed that of the 8.7 million households that are in a position to invest, 42% of them don’t.

But this isn’t the only risk, because there are almost 3 million people who shouldn’t be investing yet – who have already committed.

The pandemic boom in investing has vastly increased the number of people with stock market holdings in the UK, but there are still real gaps.

There’s a striking gender investment gap – only 28% of single women invest compared to 39% of single men. Within relationships the gap narrows, but remains significant, with 32% of women in couples investing and 38% of men.

Read more: How to find the weak link in your finances

This owes something to the fact that women tend to be on lower average incomes, and those who earn less tend to invest less. In couples, they share more costs, so can free up more for investment.

There’s a singles investment gap too, because while 48% of couples invest only 32% of singles do. This is an extension of the singles tax, because living on your own means you’re on the hook for all the costs and have less available to invest.

The Barometer assumes that households are in a position to invest if they have enough savings, don’t feel their debts are a burden and don’t have arrears.

To be financially resilient, households need enough savings to cover three to six months’ worth of essential spending — rising to one to three years’ worth in retirement. Meeting these criteria gives people the freedom to look to the future and consider investing for five to 10 years or more.

The Barometer shows that it’s not just when money is tighter that people miss out on investing. The highest earning 20% of households are most likely to be able to invest – 3.2 million households in this group could, but nearly a third (31%) aren’t doing so at the moment.

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With no financial reason for holding back from investment, it comes down to a lack of confidence and knowledge, where people don’t feel they know enough about investment, have inflated fears about risk, or underestimate potential gains.

However, there’s also a group of 2.9 million people who are taking the plunge before it makes sense for their finances. Some 28% of households who don’t meet these criteria are already investing – when they should be focusing on short-term resilience.

Read more: What having children later in life means for your money

In some cases, this will be because people are unhappy with their financial circumstances, and are trying a get-rich-quick approach out of desperation. Where they have been tempted into high-risk plays like meme stocks or cryptocurrency, they could lose far more of their money than they ever expected.

Aiming for investment is laudable, but it shouldn’t come at the expense of meeting debt obligations and building emergency savings. It doesn’t mean you have to shelve your investment ambitions altogether. Plenty of people put some money aside every month for both emergency savings and for the future. It’s about finding the balance that makes the most sense for your circumstances.

Sarah Coles is a personal finance analyst at Hargreaves Lansdown and co-presents Switch Your Money On podcast.

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