We’ve all heard the stories. Particularly from grandparents (why is that?!). The cautionary tales of friends of friends, relatives of relatives. Those who sunk their life savings in a promising investment, only to end up bankrupt and red-faced a few years later. The reasons not to invest just keep on coming. Market downturns, city banker fraud, mistrust and more... savings must surely be safer, right?
"I want to keep my money … saving is surely safer?"
With all these investment horror stories, it’s a no-brainer for some people to stay away. It’s sensible to keep your hard-earned money nice and safe in a savings account, right?!
… Well yes and no.
Read on to understand how you can help to protect your savings for the future, and find the best solution for your situation.
When is it better to put your money in a savings account?
You should aim to have enough money in your savings to cover your living costs for 3 months. This is emergency money. If you are looking to buy something within the next 3 years, such as a car or paying for the cost of education, using a savings account is a safer option. Anything longer than 5 years … seriously consider investing.
How does investing protect your money?
For money that you want to preserve – the money you want to grow with you and spend in more than 5 years – you'll be disappointed with a savings account. Inflation and currency depreciation sneak up on your money over time, you'll have the same amount… but you can’t buy as much with it.
1. Inflation protection
50 years ago, it would take you a week to earn around £30, now you can earn that in less than a day. It is a nasty shock to save weeks of salary, only to find that it’s worth much less when you need it most. Investing in stocks and shares protects against inflation, this is because when you buy a stock or share, you actually buy a bit of a company. It’s yours, you own a percent of a company. It’s like buying a little bit of gold or part-owning a house. So if you spent a week’s salary today and bought a share, it should be still worth a week’s salary (hopefully a lot more … which is better than gold or property) in 50 years’ time, when inflation has eroded away everyone else’s savings.
2. Off-setting currency depreciation To protect against currency depreciation, which is really becoming very relevant right now – see my article “the pound takes a pounding”, choose a range of investments with different currencies. I use a managed Stocks and Shares ISA account, so that it is all done for me. I fill out a few questions online, pay in my money with my debit card and then it’s done. Takes maybe 15 minutes, and my money is much better preserved for the future. If you live in the UK, you can find a whole range of “do-it-for me” Stocks and Shares ISA options here with this useful comparison guide.
"It feels reckless... isn't it just gambling?"
If you are new to investing, the idea seems scary, it feels like gambling. Except more than gambling, it feels like throwing all your money into oncoming traffic and hoping that some of it will magically double. I felt this way for a really long time. I felt that investing was for only the very smartest people and I wouldn’t even know where to start. Let alone how to do it when I got there. However, in reality, by following some simple rules you can set yourself up for a good start.
Here are the essential investing ground rules, to help you make the best decisions:
1. Don’t put all your eggs in one basket To be clear, “investing” shouldn’t be shovelling all your money into one business venture that your partner, neighbour or son-in-law thinks has real potential. That actually is like gambling. It should be an intelligent mix of investments, Investopedia recommends at least 15 -20 companies. Professional investors tend to have at least 1000 for their clients, as they buy funds which contain many companies. It could be a mix of companies (stocks and shares) and loans across different countries, companies and institutions (bonds). These investments should be a real cocktail of different sectors and locations to keep it super diverse. Why? Because if one goes down, you still have money elsewhere. It’s the same as the expression “don’t put all your eggs in one basket”.
2. Time in the market is better than timing the market The best thing you can do for your investments is to give them time to grow. Don’t chop and change things around, don’t be a wheeler dealer. Stay classy and stick to the strategy. Some people prefer not to check their investment progress most days to avoid the temptation (like me!) – that choice is yours.
3. Less time, less risk Generally, the longer you have to invest, the more “risk” you can afford to take. Everyone is different, but this is the general rule that (for example) large pension funds and investment managers tend to follow. In other words, if you have more than 10 years to invest, it is probably a better idea to invest in stocks and shares (equity). If you have less time than this, it may be a better idea to invest in bonds.
"Is it as complicated as it seems?"
When I found myself unexpectedly working in wealth management (my family are still picking their jaws off the floor over this), it took about 5 years for me to shift through the BS and understand that actually… it can be really simple. It just somehow feels the opposite when you are on the outside. This is for a few different reasons, one reason I would like to highlight are the tight rules around advertising.
Financial services cannot promote to customers in the same way as other companies
I came to realise for myself that investing is actually safer than cash over the long term. That is my own opinion, I wouldn’t be allowed to say that if I was writing on behalf of a company. This is because there are very strict rules around making financial promises. This leads to a lot of overworked, convoluted sentences when firms try to promote their services, such as “You could make more money over the long term, depending on your circumstances, capital at risk”. Which makes investing seem even more untrustworthy.
If you are interested, I would recommend to do some research on the key points of investing. Especially compounding. I quite like this informal Motley Crew article on the miracle of compounding returns.
For a quick overview of investing and how it makes you money, my article on 7 benefits to investing gives a strong breakdown, and pretty solid starting point... even if I do say so myself!
"Why don’t more people invest?"
I am convinced that if everyone knew about investing, nobody would be keep their long-term savings in cash… and I have my own conspiracy theories about why it is made to feel so complicated, which I probably shouldn’t share here.
The take-home message is that it is NOWHERE near as scary as it seems. In fact investing can be very sensible, more sensible than cash if you want to retain the value of your money for more than 5 years.
It doesn't have to be time consuming or complicated. If you are able to use Amazon, then you already have all the transferable skills you need to become an investor online. Stick to the ground rules, and avoid emotional reactions. There are no promises in finance, and I cannot guarantee anything, but do look at the research and history. You will find a compelling argument.
I am not an advisor, and I am not selling anything (check my website, I am a financial copywriter, I just write and explain things!). You can rest assured that these articles are my true thoughts, which I write out of passion.