Everybody knows how to spend money. That’s the bit we all get. Just hit the shops, or log on to the internet, and watch your money slip away.
Investing is a different matter. They don’t teach it at school, you don’t learn it in the workplace, and many never get the hang of it. This is hugely frustrating, because investing is much, much better for you than spending. It’s also easier than you think.
Saving is for the short term
Many people confuse investing with saving. Saving involves sticking cash into a bank account, to build up a financial cushion in case you have to, say, repair your car, buy a new fridge, cover a period of unemployment, and so on. Ideally, everybody should have enough cash to cover six months of outgoings, but be warned, you will generate little interest on this. Over the years, the value of your money will fall in real terms, as inflation takes its toll.
Saving is for the short term, but investing is for the long term. You should only invest money in the stock market that you will not need for at least five years, and ideally, much longer than that.
Investing is for the long term
Many people shy away from stocks and shares because they are worried about volatility. They watch the news, see the FTSE 100 rise and fall from day to day, and decide it’s all too risky for them. However, if you invest for at least five years – and ideally longer – you can ignore those day-to-day movements, because history shows the long-term trajectory is upwards.
Since inception, the FTSE 100 has delivered an average annual return of around 9%, compared to the 1% or so you get on cash. Over the long run, it will make you much richer than saving, making it the ideal way to build funds for your retirement.
Your first step should be to set up a Stocks and Shares ISA with an online fund platform. This allows all your money to grow free of tax. There are thousands of shares and funds to choose from, but you can keep it simple, and start with a FTSE 100 tracker, sold by the likes of iShares and Vanguard. As your confidence grows, you can buy a spread of funds covering different markets and sectors, or individual stocks and shares.
The stock market gives you an unbeatable combination of capital growth when prices rise, and income from dividends, which are the regular payments that companies make to investors as a reward for holding their stock. Some stocks yield more than 5% a year, a far higher return than cash. You should reinvest them back into your portfolio, to generate further growth.
Top up your investments whenever you have cash to spare, and leave the money to roll up for the longer run.
Investing is simpler you think, and way more rewarding.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.