Hello! Today we look at the magical benefits and powers of why you should invest. This article is aimed at those who’ve managed to clear their debts only and are in a stable financial position as that takes “needs priority” over this. If you’re not in that stable position, this earlier article on managing your debts may be of interest.
A quick cover note – this article is on the why you should invest. We’ll cover details of what investment options are out there in a future separate article. (Update: And now you can, here!)
The Financial Wilderness here is talking about investing in the context of traditional investments in high-grade companies and would never encourage you to invest in the more speculative end of the market. Rule 1 is always be aware on what you’re getting yourself into.
Anyhow, let’s begin! Mention investing to the vast majority of people under 40 and the vast majority will pull a face and say it’s something for later, or there are other priorities. Those arguments may be valid, but there are two important key counter arguments to that:
Reason 1: To invest early really pays dividends! (Yes, that pun is appalling)
Compound interest is literally “interest on interest” and is a wonderful thing. Simply put, if I invest £100 and get a return of 8% on it I have £108. However if I leave it invested the 8% gets applied to that £108 and the pile therefore keeps growing exponentially, not just off the initial investment.
I’ve got a challenge here, in that why should I explain further the benefits when Mary Poppins does it so effectively for me! (And if I try to do so in song myself, it may be entertaining but for all the wrong reasons……)
It’s not quite the spirit of the film, but ol’ Mr. Dawes has it right and investing your tuppence rather than feeding the birds is the way to go (sorry birds…..!)
Let’s demonstrate just how big those benefits can be over time with some longer time periods:
We’re going to assume that you get a 8% return each year and invest £150 a month. The below is designed to show that longer time periods of investing can make a real difference.
I invest my first £150 at age 35. By the time I hit 40, the rolling effect of this is that I have £11,318. (I have deposited £9,150 over 5 years and gained £2,168 in interest).
I invest my first £150 at age 30. By the time I hit 40, the rolling effect of this is that I have £27,958. (I have deposited £18,150 over 10 years and gained £9,808 in interest).
I invest my first £150 at age 25. By the time I hit 40, the rolling effect of this is that I have £52,747. (I have deposited £27,150 over 15 years but by this point I’ve gained a whopping £25,598 in interest).
Wow! That feeds a lot of birds. That rolling effect just shows that if you can set aside a little bit early just how beneficial the effects are in the long term.
A note of caution: These assumptions assume you stay invested and think long term. You should be aware that markets fluctuate, and in practice the 8% interest example I’ve used would not be 8% every year but ups and downs averaging out to that. You need to give careful thought to how you invest to account for market variability and how much you can tolerate. You may also need to pay capital gains tax depending on your circumstances.
Reason 2: If you have other priorities (like saving for a house) you can still make the money work for you.
Now this largely depends what point in any savings process you are at. Investment provides returns because we either trade risk (that we might lose money) or liquidity (that we cannot access money when we would like).
If you’re trying to save up for a house or large purchase and know you won’t need the money for some time though, you may want to consider other options than leaving it in a current account. Many people simply like to know their “pot” is there and simple but this could be squandering potential gains when we could look at low risk options.
In the (potentially) higher-yielding stock market returns can be variable. However highly-rated Bonds provide a lower risk (and therefore return) whilst allowing flexibility of allowing your money back at set periods (for instance, you can choose to invest for 1 year). This might net you some useful extra.
In summary – making your money work for you (and getting it started early) can really pay off. Worth considering, hmm?
The “Starting to Invest” series has several other posts. You can read about what investment products are out there here, and then how to understand your risk profile here.