MONEY COMMENT
Get Richer On Just £2 A Day

By Cliff D'Arcy
October 28, 2003

Yesterday, I was discussing the philosophy of Foolishness with the producer of a new TV show about money management. I explained that, despite the incredible complexity of the financial world, most money decisions fall into one of five basic categories:

1. Budgeting and spending: learn to spend less than you earn, thus creating a monthly surplus to help you achieve your life goals.
2. Borrowing: although it's usually a good idea to buy a home using a mortgage (the cheaper, the better), steer clear of other expensive debts, such as overdrafts, credit cards, store credit and personal loans.
3. Saving: put aside money every month for your short-term needs (for a holiday, car, house deposit and so on) and build up an emergency fund to cope with life's ups and downs.
4. Insuring: protect yourself, your possessions and the people who rely on you, but shop around for the best deal every time.
5. Investing: harness the long-term performance of the stock market to make you wealthier.

So, assume that all has gone well on your personal path to wealth: you budget sensibly, have no expensive debts, save each month and have the protection you and your dependents need. It's at this (fairly comfortable) point that almost everyone stops. They never go beyond saving in cash and other low-risk products and ignore the final stage of Foolishness: investing.

That's a crying shame, because investing is the most rewarding and fun part of getting richer. Over the thirty years to 2002, the UK stock market returned an average 12.5% a year to patient investors. That's a darn sight more than cash, bonds, property and other mainstream investments.

After I'd explained all this to the producer, he asked whether he needed a lot of money to start investing. Not at all, I explained, and directed him to this article, which shows that you can start investing in a cheap, simple, low-charging index tracker with as little as £1 a month!

However, if you can spare just £2 a day, you can embark on the road to financial security. Instead of buying that sandwich, magazine or after-work pint, put £2 aside each day. That comes to £730 a year, or roughly £60 a month.

If you invest £60 a month over long periods, you can create seriously large sums, as this table shows:

                        Investment period
Annual growth   Ten years   Twenty   Thirty
      0%         7,200     14,400    21,600 (this is purely what you've paid in)
      3%         8,388     19,660    34,808
      6%         9,796     27,339    58,755
      9%        11,465     38,607   102,863
     12%        13,442     55,191   184,858

So, over thirty years, saving £60 a month - a total of £21,600 - would produce £102,863 if your investment grows at 9% a year. Of course, inflation (rising prices) means that this sum will buy a lot less in thirty years' time, but it's a good start.

To me, investing in shares is a no-brainer, because their superior long-term returns more than compensate for their higher risk (and for the strict patience required)!

More: Learn to Invest | The UK's Cheapest Index Trackers | Twenty Terrible Trackers.