plonkee money an english-er's thoughts on personal finance

May 15, 2007

five steps: step 5 invest in the future

Filed under: investment — plonkee @ 12:36 pm

This is the final post in an irregular series on the five steps to solid wealth. Step 1 was spending less than you earn, step 2 was paying off consumer debt, step 3 was to grow an emergency savings account, step 4 was to insure yourself adequately and no more. Step 5 is to invest in the future – this is the step that you don’t so much complete as begin and continuously work on.

First of all, I should start by saying that investing in the future means sacrificing money and/or time now in order to have an improved life at a later date. The most important way in which you need to invest for the future is to ensure that you are not reliant on the state to provide you with a comfortable old age. It is true that the state is likely to keep you off the streets by way, but there is unlikely to be enough money around to keep you out of poverty by the rest of society’s definition. There are tax-advantaged vehicles that can help you out with this aspect.

Other ways of investing in the future could mean investing in your children’s future by putting away some money for university fees or helping them with their first house or car. It could also mean investing money and time in your career by studying for additional qualification or moving to a location that will enable you to have a better salary or quality of life.

In any case, investment considered here is predominantly for the medium to long term. Over this time frame your biggest enemy is inflation and your best defence is a high average rate of return. Both of these are factors due to the magic of compounding, which by the rule of 72, means that an inflation rate of 3% will halve the spending power of your money within 24 years, whereas an average rate of return of 3% will double your money within 24 years. Some simple maths should tell you that a rate of return over inflation is needed to make your money grow and a return under inflation will make your money shring in real terms.

One of the worst ways to invest is therefore is by stuffing money under the mattress, the best ways are those investments that typically beat inflation – generally stocks and property. I favour stocks over property because the start up money required is lower and the rate of return has historically been at least as good as property. Whatever you invest in, the key thing is to be consistent and sensible. Keep an eye on your money, learn about ways of investing and eventually you will achieve solid wealth.

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