INVESTMENT
Most people can save, but few choose to invest for one of these three reasons:
- Belief they haven’t got enough money to invest.
- Fear of failure.
- Not knowing how to.
How much is enough?
So, if many people believe they need more money before they can start to invest, how much is enough? £100, £1000, £10,000? Actually, I really do believe you can start to learn how to invest with as little as £200. It’s more about getting started than waiting until you have ‘enough’. And when you do have enough, you won’t want to risk losing it by making the wrong investments because you have no experience.
Fear of failing
Investing can seem very daunting and many fear the risks are too great. Of course, in reality, investment, if approached the right way, needn’t be high risk at all. Here’s an idea to get you started and to help you overcome that fear.
Imagine you have three barrels that are standing on top of one another. The top barrel is your easy-access barrel, which is used for day-to-day living expenses. Your second barrel is for safe investments. And the third (bottom) barrel is your higher-risk investments.
Your job is to fill the barrels top to bottom. In the top barrel (the one that gives you easy access), you need to have enough money stored in there to pay for three months’ worth of expenses. So, if you have a lifestyle which costs £1000 per month you need £3000 in that barrel. It’s fair to say if you don’t have any current investments then that may seem like a big task and not a very sexy one as you’ll be putting the money into a building society or bank account, or perhaps maximising a tax-efficient government incentive to save.
However, once you have filled that barrel any excess will start to pour over into your second barrel. This includes the money you were putting into the first barrel plus the interest the first barrel produces. This barrel should be built to hold the equivalent of 6 to 12 months’ salary and invested in safer investments such as blue-chip companies with excellent steady growth records, property and legitimate investment schemes.
Finally, your third barrel will start to fill with the overflow from the success of barrel number two. You can use this to further invest in the areas from barrel two or you can take some higher-risk investment opportunities. This barrel should have enough invested to pay for your current (or desired) lifestyle with the income from the capital. Here’s the exciting bit – you get to spend what overflows from barrel three!
It may take you many years to fill all three barrels but the most important thing to do is to make a start. If you don’t do it now, you’ll kick yourself later.
Not knowing how
That’s like saying, ‘I don’t know how to cook so I’ll just starve’. You can find out the basic hows by reading a few books, asking people and bringing it to the forefront of your attention. A word of warning from a very old friend – you don’t eat everything you see so don’t believe everything you hear!
Invest and invest again
When your investments start to pay, the real key is to reinvest the interest. It will be tempting to take the interest and spend it – you’ll say things like: ‘Haven’t I done well, I deserve it.’ It’s tough, but every great investor has used the same formula of reinvesting their returns to create their highly-successful investment portfolios. Here’s why: two magic words: ‘compound’ and ‘interest’.
Did you know that if you invested £1000 now with an annual return of just 4% you would have £7,106 in 50 years? That may seem like a long time, a low rate, a poor return and nothing to get excited about. But what if you invested an additional £1000 every year? You’d have £165,880 after 50 years. Still not exciting enough? What if you learn to be a brilliant investor? What if you invest £5000 a year every year over 30 years with around a 10% return? Congratulations, you’ve just made a million! The younger you are the slower you can go; the mistakes you can afford to make can be bigger – and you’ll get bigger returns.
If you don’t have the knowledge, you can learn it!
Today you can go on investment courses, join clubs and learn online. There are dozens of excellent books available on how to invest and I’m sure you’ll find the right thing for you.
‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’ (WARREN BUFFETT, THE THIRD RICHEST MAN ON THE PLANET (AND ALL FROM INVESTING))
Ah, and one more thing – your house is not an investment. It seems silly with everything you read about property prices, but unless you plan to sell it and use the money then your house is, in fact, a liability. That’s OK, though, as we all need somewhere to live, just don’t fall into the trap of saying: ‘My house has gone up in value by £X, aren’t I a good investor.’
BRILL BIT
It’s a well-documented story that in 1626 Peter Minuit bought Manhattan Island for the equivalent of $24 worth of beads and trinkets. But did you know that if you had invested that money in a treasury-backed government investment programme and the interest was compounded, you would have enough money to buy back Manhattan Island now!