Don’t Save – Invest!

Ask most people how to be financially secure and they’ll say you should save money. This sounds so obvious that it must be true. Saving here is the concept of hoarding your employment income in a bank account, where it builds up to an appropriately high level… and then gets spent, usually on acquiring liabilities that cost you money.

The prevailing mindset is to view savings as delayed spending, with your heard saved earnings there to be spent on some thing at a future date, whether you’re saving for annual expenditures like car tax, or a holiday, bigger house, or to slowly be eroded during retirement.

The route to financial security does not rely on building up capital only to spend it later – instead, your saved money should be locked away, ideally forever, with each dollar or pound hard at work in an investment vehicle working that provides you with an income through regular high returns – by swapping your capital for income that you can reinvest, you can build up a pot sufficiently large enough that you can draw a lifestyle supporting income from it, which will pay for the bigger house and holidays without you having to touch your invested money. You’ll never have to save again!

Banks currently have record low interest rates, which when you compare against the rate of inflation, is giving you a negative return in “real” terms. Inflation, which is the annual increase in the cost of stuff, is often around 3%; but if your savings rate is only 1%, your savings are not able to buy as much stuff as they could before.

Savings can legitimately be considered insurance against a rainy day – they provide liquidity (which means it can be relied on for easy access). We suggest you should have 6 months of expenditure saved for a rainy day, but no more – remember that this cash is getting hit all the time by inflation!

Anything over this should be invested; this is the money that you don’t need and could afford to lock away indefinitely, that would have just been stuck in the bank to fester. Investing is the superior route to financial security, because the income stream it can provide lasts forever – and you’re getting paid without putting in any of your time.

But wait… investing is risky, right? True, we should caveat that if approached foolishly, investing could lose you money. The solutions here are twofold and simple – first, you should only ever invest money that you don’t need to spend on other things, so that if you do lose some of it, it’s not such a blow.

Secondly, the reason people lose on investments is because they didn’t know what they were doing when they bought in – educate yourself with the tips in on this site and our recommended resource section to slash the risk of investing and set your portfolio free.

Investing can actually reduce your overall financial risk – a correctly balanced portfolio will give you a second income stream that reduces or negates the risk of being made unemployed and not being able to pay your bills. We personally would feel far less secure without our respective safety blankets of passive investment income to fall back on!

Investments are also supercharged by 3 powerful tools that a bank savings account could only dream of.

1)   Compounding: your freedom fund generates interest which gets reinvested, and then the interest you reinvested earns interest on it, and so on until you pot starts to snowball from interest stacked on top of interest.

2)   Two types of return: these are capital growth and passive income. An example from our portfolios is an investment property investment that grows in market value by 10% a year, but also gives a 20% annual cashflow return – that’s 30% total! This didn’t require any luck or specialist skills to achieve (anyone could do this, and we’ll show you how another time!). The attractive part of this investment for us in the 20% passive income, as this is real cash-in-pocket regular income that can be spent or reinvested, while the 10% capital growth is a nice-to-have extra.

3)   Debt leverage – banks will lend you money to buy assets! We’re thinking here of property on a buy-to-let mortgage, but there’s nothing stopping you taking advantage of low interest loans or money transfer credit cards to buy income generating tracker funds on the stock market, for example, so long as the returns are higher than the debt repayments and you feel comfortable doing so.

With that property we just mentioned, it’s possible to get capital growth of 10% because house prices only have to go up by 2.5% to achieve this, because the bank will lend you 3 quarters of the purchase price. If you pay £25k of your own money for a £100k house that grows in value by 2.5%, you keep all those gains, not the bank! Your gains are 2.5% multiplied by 4 (10%), because the house is worth 4 times what you had to actually pay for it.

The real power of investments is time, which will allow your invested seeds to grow and grow, so start now! The biggest hurdle to breaking into the investment mindset comes at the start, when you’re trying to build up the courage to buy that first asset. Trust us, once you make the jump, whether its £50 of shares or something new like peer to peer lending, the mental wall that’s kept you from thinking like the wealthy will be crushed forever.

On the subject of the wealthy- rich people invest! In most cases that is why they are rich, not the other way around. We’ve all heard stories of footballers and lottery winners who had money in the bank, but none of it was invested and it all got spent – they are no longer rich!

So, think like the rich and not like the poor, and buy that first investment. You’ll be glad you did.

Recommended Posts