Investing, as opposed to saving, means putting money into something that should make more money for you over the long-term. Saving is for the short term and, although it should grow gradually, it is unlikely to make big money for you over decades.
Investing seems to be so hard and only the preserve of those who are already rich.
Nonsense! Anyone can invest, even if they only have £10 a month to put away. In fact, long-term, it’s amazing how small amounts of money can mount up if you put them regularly into investments that perform well. You don’t need to be a genius to do it. You just need a bit of information and some stamina. Here are some investing rules to help you get rich long-term.
- Leaving your money in something for a long time,ideally a minimum of five years and preferably a lot longer.
- It’s done with an eye to providing yourself, or your children, with a large amount of money at a particular time in the future.
Investing is an excellent idea, but lots of people get it all wrong. Many are ignorant of the basic principles of investing and they think it’s complicated. It’s really not. However, if you don’t know the basics you can be prey to dodgy companies, that want to sell investment products that make them lots of money but keep us poor.
Step 1 – get out of debt
There’s no point trying to invest if you have money you owe on credit cards and loans. Use any spare cash you have to pay that off as fast as possible.
Step 2 – create a ‘savings safety net’
This is really important. All the big investors say that before you even think of investing for the long-term you should set aside enough money in a savings account to cover your outgoings (mortgage, utility bills, insurances, basic food and travel etc) for three to six months. So if it costs you £1,000 per month to keep the roof over your head and body and soul together you should have a savings account with between £3,000-6,000 in it as your ‘self-insurance’.
A recent survey by HSBC found that a third of us could only cope for five days if we suddenly lost our income stream. As we show in this savings article, setting up that savings safety net can make the difference between financial survival and bankruptcy.
Step 3 – make sure you have some money in a tax-saving pension
If you work for a company and they offer a company pension scheme JOIN IT! Do not hang around any longer. Of course you will have to put some money in, but they will too. IT’S FREE MONEY. DO IT!
If you don’t have access to a company pension, set up a Stakeholder pension for yourself or a Self-Invested Personal Pension (SIPP).
The point is that with a pension, the government puts in the tax you would have paid on the money you invest. This means you get more money in the pot from the start. Also, as you can’t get your hands on it until you’re 55 it’s a good discipline for anyone who might otherwise be tempted to dip into investments.
Step 4 – invest in an easy, cheap stock market fund in an ISA
The easiest way to invest in the stock market (and remember, this is a long-term investment) is through an Index-tracking fund. They’re simple, cheap and effective. They also tend to do better than most managed funds (those run by over-paid City boys).
Make sure you use up your ISA allowance each tax year (April 6th to April 5th). From the 6th of April 2017 you can put up to £20,000 in an ISA-wrapped stocks and shares investment. Put as much as you can in that so that you don’t have to pay tax on what you make. Index-tracking funds come pre-wrapped if you want, so just ask them for a fund ‘pre-wrapped in an ISA’.
Step 5 – invest in at least one other ‘asset class’
Ideally, you should be putting money into three or more different investment ‘asset classes’ (e.g. shares, pension, property, cash, bonds). You should keep putting money into the pension and stock market products each month/year, but it’s useful to spread your money about into different products too.
Keep some ‘liquid’ cash available too. That means you should keep a certain amount in an easy-access savings account just in case a really good investment at a good price comes up. It’s good to be in a position where you can invest in something quickly.
Step 6 – leave it
You really don’t need to keep messing about with your investments once you’ve put the money in. It’s a good idea to keep an eye on them once a year or so but make sure you’re not panicked into selling your shares just because the stock market has dived a bit…or a lot. That’s what the stock market does.
In fact, seasoned investors wait for the stock market to tank before they go in and buy up lots of shares. It’s because they’re cheap then. For most people, though, the best thing is simply to invest regularly – ideally through a standing order every month – and keep on doing it for years. Over time, your investments will generally grow.
Get the inside track on how to invest with these FREE investment guides i,
Honestly, investing is not hard. You can make more money for yourself than the City boys if you just get a bit of basic information and don’t let fear or greed take over your thinking. Follow these principles and you will be able to invest properly for your future:
- Think long-term. This is easier when you’ve had a think about where you would like to be in five years and beyond. Set some goals for yourself – short-term, medium term (5-15 years ahead) and long-term (15 years or more)
- Spread your investments. This is easier when you have more money to spread, of course. First put your money in one kind of investment vehicle (like a company pension). Then as your income and savings increase, try put small bits of savings in different investment products (for example some in shares, some in cash, some in property and so on). This is known as diversifying your portfolio or ‘asset allocation’, and this way, if one or two of them goes belly-up, you will still have the others to fall back on.
- Never invest in anything you don’t understand. Even if that nice, smart adviser tells you the product is bound to grow and give you security later on, if you don’t understand how it makes money, there’s a good chance it won’t.
- Never invest in anything advertised on TV. TV advertising is very expensive and companies who can afford it are clearly making too much money out of their clients – you – to pay for it.
- Be wary of investments advertised in newspapers and billboards. This is cheaper advertising but it still costs. Most of the best, simplest and cheapest investments are hardly advertised at all because they don’t make that much money for the financial companies. For example, tracker funds are almost never advertised. Makes you think huh?
- Never ignore the downsides to any investment. When investing in shares or other products like bonds, be aware that one of the biggest factors that determines the performance of your investment is the charges, or costs each year. For example, with equity funds (where you pool your money with other people to buy shares), the management fee is taken out of your money each year before the rest is invested. It is usually much higher than the cost of an Index-tracking fund. This cuts down on the amount you can make in that year. It’s the same with property – if you have to pay out £1,000’s per year to keep it going that will reduce the amount you make from it overall.
- NEVER invest in something just because everyone else is. In fact, when everyone else is investing in something (for example technology shares or property) that is precisely the time that you need to stay away from it. Top investors like Warren Buffet ignore popular opinion and invest only in what they personally believe to be sound ideas. That’s how they get rich!
- Compound interest is your best friend when you’re investing. Try our savings calculator to work out how much you could make over the years with your different investments. [compound_calculator]
- If it sounds too good to be true, it probably is. Really.
Finally, if you’re serious about getting some basic investing information, get my book, ‘Beat the Banks’.