Over the course of a lifetime you get lots of advice. Some is helpful, some not. Some suggests what you should do, some what you most certainly should not do. And when it comes to money, there’s a wealth of advice available from friends, colleagues and across the internet.
Much of the money advice on offer today revolves around how to save it and there are websites to help people squeeze the most out of their household budgets. Interestingly though, fewer people offer advice on what can really make you more money, like winning a promotion or setting up a business.
However, the best money advice I ever received wasn’t about saving money, nor about how to make more of it. It was this – invest as much capital as possible throughout a lifetime in a wide range of assets, starting at as young an age as possible. This advice could be beneficial for four key reasons.
You can start young
Investing at a young age allows the effects of compounding to be maximised. An annual return of 7% sounds relatively appealing over one year. But if it’s repeated over a long period and a 7% return is generated on money that has itself already enjoyed such a return in multiple years, then the total figure will be much, much higher. In fact, £10,000 invested now for 40 years at such a return would be worth just under £150,000.
It eases other pressures
Investing diversifies an individual’s income stream. In other words, someone who has a portfolio of shares is less reliant on their job to pay the mortgage or rent, to pay their bills and to lead a comfortable lifestyle. And while losing a main source of income is always a challenge to overcome, having investments that generate a 4% or greater yield each year can help to alleviate at least some of that pressure.
It’s simple
Investing is incredibly simple. Saving money may be getting easier thanks to the internet, but it still requires considerable effort in order to access the best deals. And while generating higher income is even more difficult in terms of increasing your knowledge, working harder and coming up with business ideas, investing is relatively straightforward. In fact, building a diversified portfolio of 20-30 stocks is achievable for most people and with such a large amount of information on offer, the return-versus-effort ratio is relatively high.
It works
When most people either reduce their costs or earn more money, it’s either spent or saved. While the latter is a good habit to develop, sitting on cash piles never made anybody rich. Returns on cash of more than 2% are highly unusual at the moment. And while inflation is less than 2%, the real return on cash is unlikely to boost an individual’s net worth in the long run. Investing in the FTSE 100, on the other hand, has produced an annualised total return of around 9.4% during the last 32 years.
So, while saving money and earning more money are definitely worthy pursuits, the reality is that investing what you have available is the best means to improve your financial outlook. Yes, maintaining a cash buffer in case of emergency is sensible. But in the long run, investors tend to be better off than savers and even, in many cases, than high earners.
