Making a million might sound tough. But it’s quite possible if you invest a humble sum of, say, £100 per month in UK shares. Yet you’ve got to be patient and have a consistent approach. I’ll explain how I am planning to get rich this way.
Save some of your income
Earlier I wrote about George Clason and his book “The richest man in Babylon“. In this book the first recommendation on how to get rich was to save at least one tenth of your income. It could be £100 per month or more. But the money you save should work for you. This means you have to invest it successfully.
Now you might be wondering where to invest your savings. Cash accounts don’t even cover inflation. The same is true of bonds issued by well-esablished companies. As concerns commodities, I am really bullish on gold and silver. But they have an important disadvantages – they pay neither interest nor dividends. Instead, you’d have to pay insurance and storage fees to stay invested in the physical commodities.
Investing in UK shares
In my view, the most profitable way of investing is buying FTSE 100 shares. I agree that some of them are quite expensive right now. But there are some undervalued ones too. In fact, many companies are down this year in spite of the remarkable rally. I look at the following things when I do my stockpicking.
First, I check the price-to-earnings (P/E) ratio. It helps to get a rough idea of how overvalued or undervalued the stock is. The lower the P/E is, the more undervalued the shares are. After that, I check the company’s credit rating and the rationale behind it. It considers the company’s financial health. Then, I look at the dividend yield. A yield of 1% or 2% isn’t attractive. But if it is too high (over 10%), then it’s likely the dividend will be cut. So, I also check the dividend cover ratio. You get it by dividing the EPS (earnings per share) by the dividend per share. It’ll help you understand how sustainable your income will be.
The power of compounding
After you have bought some UK shares, you should, generally speaking, sit back and relax. Don’t worry too much about the market’s moves, which are often irrational. I’d just stick to my shares and keep reinvesting my dividends along with my monthly £100. All this adds up to the virtuous circle of growing wealth.
Imagine that I invest £10,000 in the stock market. The FTSE 100 index generates about 6% to 7% return per year. But my portfolio return is about 10% per year. This leaves me with £11,000 by year’s end. I haven’t even considered the reinvested dividends yet. The portfolio’s dividend yield is 4% per year, making my total yearly dividends £400. Combined with the £100 I set aside each month, this adds up adds up to £1,600 each year. I reinvest this money, which, hopefully, turns into £1,760. All being well, by the end of the first year, I have £11,000 + £1,760 = £12,760. This means my return on UK shares totals about 28% in the first year of investing alone. It’s not a fortune just yet. But imagine if you do it for a number of years and increase the monthly sum you save. I think it will be manageable to retire with a million like this.
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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.