Do you ever read news stories like “Recluse dies and leaves millions to charity“? Do you wish you could do the same? Maybe you’d prefer to leave a pile of cash to your offspring rather than charities? There’s nothing wrong with that, of course.
Plenty of investing pundits hold up such people as shining examples of financial prudence, and of how to save and invest over a lifetime. But in my view they’re missing the most important part of the word ‘lifetime’ — life.
I don’t know about you, but I’m not aiming to be the richest one in the cemetery, and I’m certainly not living my life like Scrooge, pinching every penny and leading as cheap and miserable an existence as I can just to accumulate cash.
Balance
No, the key to investing, as with most things, is moderation and balance — and you can accumulate a tidy sum and achieve financial independence while still actually spending enough to enjoy life. It all comes down to sensible financial planning.
The best thing you can do is start as early as you can. If you’ve just finished school, college, university, or whatever and you’re starting your first job, you’re suddenly going to have some worthwhile amounts of cash coming your way.
It’s tempting to just spend it all on enjoying yourself, thinking that you still have most of your life ahead of you and that it will be decades before you need to start worrying about your retirement. But no, that time in your life provides you with the best opportunity you have for achieving longer-term financial comfort.
Invest for the long term
If you put, say, 10%-20% of your salary aside each month (into a stock broker account, and buy shares when you’ve accumulated enough for a cost-effective purchase), you’ll never really miss it as it’s money you never had before. And of course, over the course of your career you should hopefully be able to increase your monthly investment instalments at regular intervals.
But how much will you be able to accumulate? Assuming you manage an average investing return of 6% per year (which is modest — you can probably get close to that from dividends alone), and supposing you can put away £500 per month… after 41 years you’ll have a cool million stashed away. If you start work at 21, that’s a pretty comfy retirement you’ll be lined up for aged just 62.
Now, £500 might be too much to manage when you first start working, but you can hopefully work up to it and beyond — and a relatively modest £280 per month would still get you a million in 50 years, or more than half a million after 40 years.
Why shares?
Isn’t investing in shares a risky business? In the short term, yes it can be — but the longer you have, the safer it is.
Barclays, in its annual equity-gilt study, has discovered that shares have been the best performing investment from 1899 to 2016, beating cash in a savings account in 91% of all rolling 10-year periods. Extended to 18-year periods, shares have won 99% of the time. And over 23-year periods, cash has never beaten shares.
The conclusion is easy — with decades at your disposal, investing in shares is easily your best chance of achieving financial independence. But live your life too.