We all want to feel secure financially secure for our future. Investing your money is the most reliable way to build wealth over time. Before you part with your hard-earned cash, you need to understand the basics of investing.
Firstly, you need to be able to afford it. There are two ways to fund your investments either with disposable income left over at the end of the month or by cutting out excess expenditure to finance the investment.
The real premise is why do it? We do it because in 10 or 20 years you’ll notice you are far better at earning interest than paying interest. But what does that really mean? Simply put, interest earned is like ‘bonus money’ the bank pays you just for keeping money in an account, such as savings.
It is a similar story for interest paid. When we take out things like mortgages, we tend to obsess about the interest rate. By reducing your interest rate by even a half per cent you could reduce your mortgage interest payment massively. In the end, you could save around €40,000 over your lifetime. Generally, people think wow I saved 40,000 simply by reducing my mortgage interest by .5% Which is great, but if you think that’s good, wait till you hear this.
Compound interest
Now imagine earning 7% over 40 years vs 0% over 40 years, the difference is colossal. As Einstein himself once said “compound interest is the eighth wonder of the world” and Warren Buffett also said, “Those who understand it, earn it, those who don’t, pay it”. Put in layman’s terms compound interest is when you earn interest on both the money you’ve saved and the interest you earn. To break this down further let’s imagine you invest €1,000 (your principal) and it earns 5% (interest rate or earnings) once a year (the compounding frequency). After the first year, you would have €1,050 – your original principal, plus 5 per cent or €50. In the second year, you would have €1,102.50. That’s because the next interest payment equals 5 per cent of €1,050, or €52.50.
Take baby steps with saving
Starting is half the battle, and the main reason to start is simply that this works, it’s always worked. It’s a simple yet effective principle. You just need to be firm with yourself and only invest what you can afford. If you find saving to be a challenge, start by trying to save smaller amounts. Even €50 can amount to €600 if invested over 12 months. That €600 with the average investment return of 7.5% will have made around €44, which is €44 more than if it was left in the bank making nothing.
Create the habit
Our greatest piece of advice would get into these habits sooner rather than later. The quicker you start the habit, the quicker you will see the benefits of it, however, you must be patient. These things take time, particularly regular investment. It’s similar to when people first start at the gym, after 4 or 5 months people who aren’t seeing results decide to pack it in. But you have to stick with it because in time you will see the benefit of it. Regular saving can be tough at the start but so rewarding after time.
Spend less, save more
One way to boost your investments is to make simple cuts to your discretionary spending habits. For example, this could be switching from that pricey hairdresser to one with a lower price or buying less branded items at the supermarket. If you assess your spending you will see there are many simple ways to shave a bit off your spending.
The next key point is getting that money out of reach. When you cut back on spending, don’t leave the savings in your pocket, wallet or current account, here you are far too likely just to spend the money on something else. Instead, make a payment that day on debt or transfer the money to a savings account where it will be out of reach.
Why not get in touch with us today to start forming smart habits to reach your financial goals.
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