If you examine the lives of people who have managed to accumulate a million or so by retirement, what do you think you’ll find? Children of the rich, company directors, other high-flyers? I think you’d be surprised to find a lot of them are ordinary, everyday folk who have mainly just been careful not to make some basic financial errors.
My colleague Peter Stephens recently explained some key mistakes that people often make once they’ve started investing, but how do you get the money to put into your investments in the first place?
Don’t spend all your cash
A great piece of advice I once heard is that you should put 10% of your income away every month, before you spend a penny of it. The best time to start is when you get your very first job and your very first pay comes rolling in. It will probably be significantly more money than you’ve ever had before, and if you save 10% of it up front and treat the remaining 90% as your income, you’ll never miss what you didn’t have.
You’ll most likely end up living in a 10% less expensive home, driving a 10% less flash car, taking 10% cheaper holidays and so on. But if you increase your savings every time you get a pay rise, and the saved 10% goes into stocks, then you reinvest all income from dividends, you could easily join the ranks of the rich.
Now, for most people, it’s probably too late to start saving 10% of your very first salary, and your monthly income might all be accounted for. But if you can make an effort to cut down on some non-essential expenses, perhaps downgrade a few luxuries, and start saving any future pay rises…
Even if you start with just a few percent of your cash, you’ll be making a great move, and hopefully you can soon be edging it up a little.
Never use credit cards
Perhaps not never ever, and if you pay off your balances every month in full before they accrue interest, they can be useful — but that does take some willpower. You might even justify paying a couple of months’ interest if it allows you to bag a bargain that saves more than the charges, but that’s getting onto dodgy ground and it can be risky buying things if you don’t have the short-term cash available.
But, absolutely never use credit cards for long-term purchases and pay interest every month. These days, many of the major cards are charging 30% per year interest or more, and if you constantly have a balance on a card, then you’re constantly losing money. Every £1,000 you have on a card for a year could be costing you £300 in interest, and it’s shockingly easy to see credit card usage effectively doubling the prices of things you buy.
Using credit cards can cost you dearly by the time you retire.
Don’t invest in anything but shares
Cash in a savings account? Bonds? Property? Fine art? I reckon you should forget all of those, as the best combination of profit potential and low risk is likely to come from investing in company shares for the long term.
We’re talking decades here, and the Barclays Equity-Gilt study has shown that investing in shares has trounced cash and gilts (government bonds) ever since it was started in 1899. There are short-term periods when shares have done badly, but over a lifetime of investing, shares have soundly beaten cash savings and gilts.
You might be surprised to learn that £100 invested in UK shares in 1945 would have grown to a massive £179,000 if you’d reinvested all your dividends. And dividends are key to the miracle of compounding — without reinvested dividends, that £100 would have grown to only £9,000.
So I’d strongly recommend putting your money in a stocks and shares ISA (using as much of your annual allowance as you can), perhaps a self-invested personal pension (SIPP), and a straightforward stockbroker account for any extra.
Never gamble
Gambling is a loser’s game. Unless, of course, you’re the owner of shares in a bookmaker. Paddy Power Betfair shares, for example, are up 2,500% since the end of the year 2000.
Obviously I’m partly referring to things like the gee-gees and the gaming tables, but more than that I’m thinking of avoiding a gambling approach to investing in shares.
Are you buying the latest big stock that your mates down the pub say they’re getting rich on? Are you piling in to a soaring share price with no understanding of what lies behind it? Are you looking for get-rich-quick shares?
If you’re doing any of that, you’re gambling, pure and simple. But if you approach it as taking part ownership of a high-quality company, and you can see where its income is coming from and you understand the valuation of the shares, that’s investing. The difference is crucial.
Don’t be a miser
You must surely have read news stories about old folks who’ve died and been found to have accumulated millions in shares? Frequently they’ve lived a miserly existence, with neighbours assuming they’re pretty much penniless. They’ve often got no family, and the wealth goes to a cats’ home or something.
Now, I’ve got nothing against looking after our furry friends, but what galls me is that people like this are often lauded as successful investors and held up as models for the rest of us to try to emulate.
Excuse me? Live a life of penury and never spend a penny on enjoying anything? And that’s a success? Now, maybe praise such a person for generating money for charity — but in my book, being the richest corpse in the graveyard is not something to aspire to.
Successful investors know how to strike a balance, and to invest their money for fulfilling their life’s plans. They enjoy the fruits of their years of hard work and their careful investment. And that is something to aspire to.
