Investing your money into a diversified portfolio such as a global index tracker is a safe and consistent way to grow your wealth over the long term. The growth through reinvested dividends and compounding returns plays a big part in your ability to reach financial independence and possibly retiring early. You want to start small since you're never invested before and you're a bit unfamiliar, but is there any point if you're not putting in big numbers?
Let me show you how a mere £13.47 a week can be equivalent to £10,000 invested into a diversified portfolio that returns 7% each year on average over the long term.
You’ve probably heard of the Battle of Thermopylae; at the very least you’ve probably heard of, if not seen, the film based on this battle. If you’re still not sure what I’m talking about, it’s the battle where 300 Spartans were able to hold off a massive army of Persians despite being heavily outnumbered.
In the world of personal finance and saving money it is also possible to demonstrate how the few can match up to the many. By saving £300 a month and maintaining it throughout the year it is more effective than having £50,000 invested into a diversified portfolio returning an average of 7% annually. Here’s a diagram to show my workings:
This goes to show how effective it can be to look at the things you are spending money on and making good financial decisions on what you really need, and what you don’t need. By cutting out some of the excess you might be able to find some savings that you are able to build up over time. The best thing is that you can invest those savings to start growing it over time, making your savings at the start even more effective.
It’s always possible to take things to the extreme and end up “not living a life”, so don't cut everything fun out of your spending. But it’s also true that by not taking control of your own financial situation, you are simply wandering around in the dark and not making any progress for your own financial future. There'll definitely come a day where you wish you had made even just a little effort instead of waiting for some magical windfall.
So here’s the advantage of being aware of the above calculation.
It might be difficult for you to find a spare £50,000 or even £10,000 laying around to invest into something relatively stable over a long time frame such as a diversified investment portfolio. Even if you did have the money you might not be too keen on making the big leap into the financial markets, especially if you’re not familiar with investing; you’d be worried about losing your money in a sudden market crash, or picking the wrong investment, or simply not having the money in your normal bank account where you're used to seeing it.
However, if you think about what £10,000 returns to you annually based on the average rate of 7%, it’s £700. And by knowing the above calculation you can break that down as £58.34 a month or £13.47 a week. Here's a diagram to show my workings:
This is something much more palatable to everyone; by being a little bit more thrifty with their finances it’s possible to match the results of returns from investments that could be valued at multiple tens of thousands of pounds. And there's plenty of ways to find the little extra each week:
Go home and cook a few more meals instead of buying lunch or take out, drink a few less beers, cancel the subscriptions you're not using, find a cheaper phone contract, waste less of your groceries, or make your own coffee instead of buying one every morning. The options are endless and it really doesn't take that much.
The very best part about this whole thing is that you have much more control over your own spending habits and the money you can save than you realise; whereas you cannot control if the value of your investment rises or falls in the short term.
So here's the conclusion; if you're undecided about getting into investing as you don't know how or you're simply nervous about the thought of it then start with saving a small amount of money that you would've spent on something you didn't need or would've wasted.
Invest that saving instead.
Not only will that saving be immediately equivalent to a big investment pot, it'll continue to grow over time and make you much wealthier in the future. That's how you become really rich and eventually, financially independent.
My mission is to help people understand their money by making financial scenarios or concepts easy to understand.
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