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Over the last year, we’ve seen interest rates on savings accounts soar, especially on fixed-rate accounts which peaked at more than 6%. However, the market is now changing and we have started to see interest rates decline on savings products. Consequently, this may prompt you to look elsewhere for the best deal and delve into the world of investments.

Investing offers the potential for higher returns compared to traditional savings accounts, but it does come with risks. There is the possibility of loss of capital, but strategic investment decisions can produce significant rewards long-term.

The key is understanding and managing potential risk, so it’s important to conduct thorough research and seek guidance from financial advisors. If done correctly, investing can help to combat the effects of inflation and increase your money’s purchasing power.

Investing is a complicated process and you need to understand the risks involved before taking the plunge. Here, we look at some of the things you should consider before investing.

Your risk tolerance

Understanding your risk tolerance involves assessing both your financial ability to withstand losses and how your mindset can handle market volatility. Factors such as financial goals and income stability all play a role in determining risk tolerance.

Your timeframe

Your investment timeframe refers to how long you plan to hold your investments before needing the funds. It's an important factor in determining your investment strategy. Short-term investors may aim to profit from market fluctuations within months or a few years, often preferring assets like stocks or short-term bonds. Whereas long-term investors are more focused on boosting money over decades, allowing them to experience market volatility but still potentially benefit from the compounding of returns.

Product knowledge

It's essential that you understand the products available for investment. This includes stocks, bonds, mutual funds and more. Having a strong grasp of these products allows you to make an informed decision based on their risk and market conditions.

Investment size

Investment size refers to the amount of capital you allocate to investment opportunities. It plays an important role in determining the level of risk and potential returns. Small investments may limit exposure to certain assets, while larger investments offer greater flexibility and potential for growth.

Returns from investing can vary depending on your chosen investment, market conditions, and your individual investment strategy. Generally, investing in assets like stocks, bonds and real estate can provide potential returns ranging from modest to substantial - but this will be over a long-term period.

Remember, investing carries risks, and past performance is not indicative of future results. Therefore, you should carefully assess your risk tolerance and investment goals to make informed decisions about the expected returns.

If you would prefer a guaranteed return, then a savings account could be more suitable. Fixed-rate savings accounts offer a guaranteed interest rate so you'll know exactly how much you'll earn after the term. For example, if you deposited £5,000 into a one-year fixed-rate savings account offering 5% interest, you would earn £250 once the term ends.