Beginners to investing are often mystified by all it entails. They’re put off by financial jargon and complex sounding processes. But it’s really not terrifying at all and can be a great way to put our money to work. When people start to take an interest in investing, they often believe they’ve missed the boat. That’s not necessarily true either. Yes, time can help build a future fortune, but even with regular investments we can achieve a decent lump sum if we start late.
Most people have no trouble finding things to spend money on. The problem is usually lack of cash for everything we want, and the same is true of investing. When people are young, they have time on their side, but little in the way of free cash. When they’re older, they may have more disposable income, but time becomes a constraint.
At 40+, I could be considered quite old to start investing, but I don’t think it’s too late. The stock market gives ordinary people the opportunity to exponentially build wealth by following a few simple rules and a structured investment plan that won’t take up too much of our time.
The power of compounding
An online compound interest calculator can be a useful tool for calculating future returns. It’s handy for preparing a wealth strategy to follow as it gives me an idea of how much I need to invest each month to achieve financial freedom.
Here’s an example. If I start with £2,000, then invest £200 per month at an effective annual rate of 6.7%, in 30 years I could achieve £236,543.
If I increase the monthly amount to £300, and achieve 7.5% in interest, I’d realise a final sum of £404,702. Compounding is very powerful and with the right combination of factors can make investors rich.
Either of these sums would provide me with a nice retirement nest egg at 70. Of course, for much younger investors, small monthly sums of even £50 can make a difference due to the power of compounding. When time is stretches out before us, small and steady can amount to a large future windfall.
Investing for beginners: just start!
I think the easiest and best way to invest is to simply get on with it. I’ve opened a Stocks and Shares ISA with Hargreaves Lansdown and set up regular monthly investments into my favourite stocks and funds. And it’s easy to change these at any point.
But how do I choose my shares? According to billionaire investor Warren Buffett, we should keep a few key factors in mind. I thoroughly research companies before I start investing in them. I wouldn’t want to buy a dud product, so the same goes when buying shares. The Motley Fool provides plenty of great reports for beginners to investing. I also find company annual reports useful, and shareholder letters.
Some businesses are overvalued, and others undervalued. We can gauge this from their price-to-earnings ratios (P/E). A very high P/E (above 20) can indicate an expensive stock, whereas a very low P/E (below 10) can show a cheap stock. This doesn’t necessarily mean a good or bad buy, though, and should only be used as an indication among other factors.
So there you have it. I don’t think 40+ is too old to start investing, just go for it!
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Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Hargreaves Lansdown. 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.