Relationships are complicated, and money complicates them further. The love of my life and I have conflicting attitudes to finance, as I was reminded this morning when she gave some scratch cards to our young son.
Scratchy problem
I never buy scratch cards, and I never play the National Lottery. I simply don’t like the odds. You will almost certainly never win anything worth having. They’re playing on people’s dreams – of ending all their money worries in a stroke, but those dreams will never come true except for a tiny, tiny number.
My girlfriend sees it differently. She says it’s fun, and the dream only costs a few pounds a week, which is cheap at the price. I don’t press the point. After all, if she does win a million on the lottery, I’ll be happy when she says “I told you so“!
There’s another way we have always differed towards money. I invested in the stock market, while she was wary of shares. That’s understandable — scare stories about stocks like Sirius Minerals or Carillion mean many people feel that way. They never see newspaper headlines screaming ‘The power of compounding can make you rich‘ or ‘A FTSE 100 tracker could give you a comfortable retirement‘!
So she’s always preferred to put her spare money in the bank. Even though it’s earning as little as 0.1% in one particular account, at least it’s safe.
I’ve tried saying things like “Forget the Cash ISA, I’d buy these two unsung heroes that have been smashing the FTSE 100 instead” as I firmly believe that cash is the wrong place for long-term savings.Â
Long-term loss
In today’s low-interest-rates world, £1,000 in a savings account offering 1% with inflation averaging 2%, means it will be worth just £837.49 in real terms after 18 years.
Despite that, my girlfriend, like many others, has always been reluctant to let go of the idea that cash is a safe haven that actually protects your money. To be honest though, I might feel the same way had I not happened to have spent years writing about the stock market.
The fact is, the stock market scares many people who think their hard-earned savings might fall 25% in a matter of days. It’s an understandable emotion, but I still think it’s wrong.
Shares win in the longer run
While the stock market goes up and down in the short run, over the longer term, it has delivered an average annual return of around 7% a year, far more than you will ever get on cash.
If you’re saving for retirement, which could mean putting money away for 30 or 40 years, shares win hands down. If you pay £100 a month into a savings account offering 1%, you will have £59,250 after 40 years. Shares generating 7% a year would turn the same monthly payments into £256,331. Over such a long period, short-term market volatility doesn’t really matter.
That’s why I say “Forget the Lottery! I’d aim to make a million by investing in the FTSE 100 instead”.
Happily for our relationship, we have struck a compromise. My girlfriend still has a flutter on scratch cards and the Lottery (so fingers crossed), but we put most of our long-term savings to work in the stock market.
I still grumble about her Cash ISA, though.