FOOL'S EYE VIEW
Three Roads To Riches

By Cliff D'Arcy
August 26, 2004

There are numerous ways to become richer. For example, you could inherit family wealth, set up a successful business or manage a big company. Sadly, these options aren't always available to the average person on the Clapham omnibus.

However, each of the following three routes will work for most people, given plenty of time and patience!

1. Life in the Slow Lane (the Cash Cart)

According to the latest figures from the Bank of England, UK residents owned £494 billion of sterling deposits at the end of June. In other words, we had almost half a trillion pounds in savings accounts, etc.

Saving in cash is a slow but steady drive. Big banks and building societies are reasonably secure and, barring major financial pile-ups, both your capital and income should be safe over a long trip.

However, saving in cash is pretty dull over the long term. Looking at the period between 1920 and 2003, cash beat inflation (rising prices) by 1.8% a year. So, to create a sum worth at least £25,000 in today's money, you'd have to save £50 a month for 32 years, which is not beyond the reach of most people. This would produce a pot worth £25,910.

So, start saving £50 a month on your 28th birthday, and you'll have almost £26,000 by the time you need sixty candles on your birthday cake. This sounds like 'old man in a flat cap' driving, doesn't it?

• Find a better savings account in our Savings and Cash Mini-ISA centres.

2. Life in the Middle Lane (the Property Bus)

Property is the investment of choice for many of today's eager entrepreneurs. And, over long periods, it has easily beaten cash, with an average annual return of 5.4% since 1920, after stripping out inflation.

Investing your £50 a month in property (if you could find a way of doing it in this fashion) would produce a lump sum of £50,095 after 32 years. That's almost twice as much as you'd have by sitting in the Slow Lane. However, property is riskier than cash, so the ride is bumpier in the middle lane. For example, property prices fell heavily in the five-year period between 1988 and 1993 - and may do so again.

• Get a cheaper home loan in our Mortgage centre.

3. Life in the Fast Lane (the Investing Hot Rod)

Since 1920, the average annual return from the UK stock market comes to 7.7% (with income reinvested, and after accounting for inflation). Investing £50 a month for 32 years would produce a nest egg worth £79,005. This is over three times as much as you'd make from cash in the Slow Lane. What's even more exciting is that three-quarters of your nest egg comes from investment returns: £59,805 on top of your original £19,200.

However, life is the fast lane is a white-knuckle ride at times, because shares are volatile. In fact, in the 58 years between 1945 and 2003, the UK stock market went up or down by 20%+ in no fewer than 25 separate calendar years. That's a lot of swerving! However, if you can ride out the ups and downs – and 25 years or so is a long journey – you should end up with a grin on your face.

• Find a cheap, simple stock-market fund in our Index Tracker centre.

At the moment, I'm 36 and saving for retirement when I reach, say, sixty, which is almost 25 years from now. Can you guess in which lane I'm driving?

More: A Cut-Price Way To Invest.