Saving money in a ISA is great at helping you counter-act inflation as you to keep more of your interest, but Cash ISAs are not going to help you grow your pennies over the long term. For that you need to be investing.
You may be in your 20s and money’s tight, or in your 30s and 40s and have lots of financial commitments. Regardless of your situation, you should be investing (and not just the minimum in a company pension scheme if you’re lucky enough to have one).
If you’re not already investing and don’t start soon you could miss out of tens if not hundreds of thousands of pounds over the course of a lifetime.
If you’re reading this in your 20s I’m especially excited you’re here reading this because time is on your side.
Investing is daunting
Unfortunately, unlike in America where it appears stock market investing is ‘sexy’ and cool’, us Brits are traditionally a bit more reserved about investing in stocks and shares.
Talking with my friends about the subject most think investing is something that only rich people do; that it’s complicated and risky; or it’s something they’ll get around to but it’s too hard right now.
There’re wrong though.
They should be investing something now, even when other financial priorities seem more pressing. Even if it’s a deliberate decision that may be right for them, I doubt they fully appreciate the true cost of their priorities. I undertand their reservations though so let me elaborate with 4 reasons why you should be making steps to grow your pennies and begin investing.
1. Long Term Return
When you buy shares you are buying tiny pieces of companies: Companies sell part of their organisation as shares to investors to gain more funds to grow and develop. Investors buy these shares with the hope that the business is profitable and pays out company profits back to them. These payments to shareholders are known as dividends. As well as the dividend money, investors also hope the shares they have bought go up in value as demand for company shares grows, assuming the company is profitable and has strong future potential.
Of course there are good and bad companies but collectively over the long term history has shows that the returns (increase in value over the course of a set time period) from businesses have consistently outperformed most other asset classes (an investment term for types of things you can invest your hard-earned pennies in: i.e gold, cash, shares, or even commodities like sugar). The difference in returns between shares and say, a Cash ISA, may seem small over the course of a year but longer term the difference becomes thousands of pounds.
Why Investing is Important
Whilst the rate of return is not important when it comes to cash savings (click here for the article) the return of an long term investment is important as it determines when you can retire or reach any other goal that requires plenty of pennies. Ultimately it is investing in shares that gives you one of the best chances to enjoy the best return over the long term. And arguably the long term investment return is more important than in the past as people are living longer than ever:
Will you be able to afford 20-30 years of not working when you retire?
Even if you saved double the amount in a Cash ISA compared with someone who invested their savings in shares, you are unlikely to end up with anywhere near the amount you are likely to achieve by investing in stocks and shares. There’s only so much you can save so investment returns have the potential to help considerably.
Important Note: Investing in shares is more ‘risky’ than cash because the value may fluctuate over time but with the right strategies and investing philosophy it doesn’t have to feel or be anything like gambling with your future. This is an article in itself and will be addressed in another post.
2. Time on your side
It’s not only about the asset class but the time you give your pennies to grow. The difference between investing now and investing later is huge. Ramit Sethi gives a good example in his book: I Will Teach You to be Rich: No Guilt, No Excuses – Just a 6-week Programme That Works (which, as my favourite personal finance book you should buy by the way), when he tells the story of Smart Sally and Dumb Dan:
“Smart Sally starts saving at 25, by putting money into a low- cost investment account. She decides to do that until she’s 35, then she stops. So she invests for 10 years. Dumb Dan doesn’t get around to it until he’s 35. He invests for 30 years, until he’s 65. And when they both retire, because of compound interest … (Smart Sally) has about £100,000 more.”
In this story Sally saves less and ends up with more simply because she started earlier. This is possible because the interest she earned early on began earning interest too. Magical pennies indeed!
3. Information Super-Highway
The internet’s great isn’t it?! Getting started in investing has never been easier than today. The preconception that investing is only for the rich may have been true a few years ago but now the barriers to investing are much lower than at any other time and anyone with an internet connection has a chance to learn. My parents would have had to visit a broker with a large cheque if they had wanted to do what I’m doing when they were my age. Instead, you can now automate small amounts directly into investments around the world with a few clicks of a mouse if you know what you’re doing.
That said, in my journey to learn about investing I found lots of mis-information and confusing things on the internet but that’s fixed now because Magical Penny is here!
In all seriousness there are some great resources online that I’ll be reviewing in up-coming posts. In the mean time, do some internet searches yourself and let me know in the comments if you come across any great finds.
4. Thinking Beyond Today
Finally, the best reason to invest is that it encourages you to think beyond today. It’s too easy to only be concerned with what’s right in front of you in life, rather than having goals on the horizon. By saving long-term you really do get a sense of empowerment that you are taking control and can reach some ambitious goals.
Magical Penny is only just beginning to talk about investing but is there anything you’d like to know or have questions about that you want answering right away? Leave me a message in the comments 🙂