Saving lures people into a false sense of security of doing the “right thing”. I’ve recently met a lady who has been saving for the last 10 years and she’s built quite nice little cushion of cash. She was always taught that saving is the most important thing she can do for her future. What no one told her is that saving and investing are the most important things for her future. Doing one without the other is risky at best and tragic at worst.
Her story was tragic in my eyes. Since she’s been saving, the buying power of her savings has been dropping. She essentially lost around 23% of her savings in the last 10 years. Investing was the missing ingredient for her.
One of the main reasons why investing is a must is because of inflation. In very simple terms, inflation is a gradual process of raising prices across all areas of the modern world – inflation affects everything from the price of food and commodities to products, energy and services. The cost of living is going up by about 2-3% a year.
In real terms the £100 I saved yesterday will only be worth around £97.50 this time next year. It doesn’t seem a lot, does it? To put it in the perspective of time – if you wanted to treat your future self to £100 worth of shopping in 30 years’ time, you’d need to put away around £214 today. Now that is a real eye opener!
This is why participating in the stock market or other investment strategies such as property is a key to securing your financial future. Stock markets for example return on average 9% a year. Calculating the returns of investments such as property is less straightforward and depends on the area where your house is, but it is also thought to be around 6-10% a year. Enough to combat the effects of inflation and keep growing your assets. This is true but only when you aim to invest long-term. Stock markets fluctuate a lot, so they are not a reliable store of value in the short-term. Property prices although much more stable in the short-term do occasionally crash too.
You might think that you don’t need to worry about your financial future since you’ll be relying on your state pension in your golden years but that’s setting yourself up for a potentially big disappointment.
The state pension was introduced in the UK by the government in 1908. It was only built for the very lucky few that would live long enough to draw from it. As life expectancy of the population keeps going up, so does the minimum retirement age to support the growing number of people relying on state pensions. As the price of living keeps going up, the quality of life that the state pensions can provide will be constantly squeezed even further. For those of us wanting to have a life in retirement including being able to afford the heating bills in our homes, state pensions are clearly not the way forward.
Which takes us to the concept of financial security. In my opinion one of the most misunderstood ideas.
What does financial security mean to you? What does it look like?
Is it being able to afford a suburban house, luxury car, couple of tropical holidays a year and occasional takeaway for our family? If so, we should all celebrate as this is what the life of most people in the UK looks like.
Let’s not spoil the celebrations by mentioning a large part of this lifestyle is fuelled by £1.625 trillion (that’s 12 zeros! Or for the visual people – £1.625.000.000.000) of UK personal debt.
Even if you don’t rely on debt to fill your life with stuff, maybe being able to afford life’s pleasures is what financial security is about?
For me financial security is not about any of these. For me, and I would invite you to adopt this thinking, financial security is about being able to cover the basic needs of my life without ever having to work another day in my life. Think about it for a moment. Your rent or mortgage, bills, food, transport and insurance paid for the rest of your days. What would you do with your life and business if you didn’t need to work?
If more of the UK and the world population lived like that, the only ones losing out would be Prozac manufacturers.
I believe that if more people and business owners were financially secure, the world would simply be a better place. A happier place. In the absence of things we have to do, we do things we love to do. How would your approach to your business change if you only did things you absolutely love to do?
In my opinion educating yourself and managing your own money is the only way to achieve financial security. Investing has to become part of your education.
For me, investing is made up of 3 steps you would need to take.
Step 1 – Saving
Step 2 – Investing
Step 3 – Speculating
Saving is all about gathering some money that you can then put to work for you while you sleep – which is step 2. The final step is speculating. Higher risk strategies which offer a chance of delivering much higher returns. The order of these steps is important. Throwing £10,000 into cryptocurrency at this moment in time is speculation. It might be a worthwhile speculation if you have some savings and a £1 million pension sitting in your investment account. But that same speculation, if you have £100 savings and no investment pot to speak of, is nothing more than gambling. I’m not going to offend your intelligence by explaining why gambling is not a way to become wealthy! ‘Put it all on black’ will never be a good investment advice.
For the purpose of this article and achieving financial security we will focus on the first two steps – saving and investing.
A large majority of the nation is only one paycheck away from running out of money. Where is your business at? If you were to stop working in or on your business, how long would you be able to afford paying your bills? Aiming for 3-6 months is a good place to start. It allows you some breathing space and a peace of mind especially if you’re just starting out as an investor.
So, let’s say that you’re starting to save, and you would like to start investing. How do you get started? Well, there are a few accounts you might want to open.
First, Stocks and Shares ISA. The beauty of this account is that once you invest your money into it, all the future returns are yours to keep. Yes, no taxes to pay on withdrawal. And you can start withdrawing any time – which means that you don’t need to wait until you reach retirement age. The amount you’re paying into your ISA should be maximised every year, especially if you’re dreaming of retiring early.
Many banks are currently offering these types of accounts – you invest, they manage it for you, and you pay for the privilege. If you read my previous article, you’ll know I’m not a fan of anyone managing your money. You’re the CEO of your future. Use banks, financial advisors or planners as they should be – your “advisors” – not the decision makers. Don’t make them the CEOs of your life or your retirement. If you would like to find out more you can find my previous article here.
The second account you might want to think about is your pension account. There are many products available out there and again I gravitate towards the products which you manage and are cheap in terms of the ongoing costs. There are two products that are particularly worthwhile the attention – Stakeholder Pension and Self-Invested Personal Pension or SIPP.
Stakeholder Pension is a reasonably cheap product as the fees that can be charged are capped. It might be a good option if you’re just starting out and you don’t need a wide choice of investments. This pension offers a limited choice of funds you can select which means you don’t get overwhelmed, but you also know the funds you’re selecting are not overly expensive.
And then, there’s SIPP – this is the Rolls Royce of pension products. You can design and build your own pension plan within SIPP. You can design it to be cheap or expensive, reasonably safe or risky. You can invest in index funds, exchange traded funds, mutual funds, individual stocks, gold, commodities and even more complex products. This is the pension equivalent of “Build-A-Bear”. Your choices are vast and that could present a challenge. But only if you let it.
I’d still encourage you to consider SIPP over Stakeholder Pension. You don’t need to invest in every fund and option out there but what you can do is start reading about them, getting used to the terms and noticing the charges. Start with whatever you feel comfortable whilst immersing yourself in the world of investments. Very often the terminology used makes a product sound complicated whilst the underlying principle is simple – look for that principle and don’t be scared off by the impenetrable language. You can figure it out.
At first you won’t feel like you know what you’re doing. You’ll mess up at some point. You’ll learn and you’ll keep learning for as long as you stay in the game. It’s all part of the journey. Don’t take big risks when you first start; just start and find your feet. You can do it.
And if you would like to find out more, get some resources to help you out on your journey or join me for some free training, just reach out. I’m running a free training in my online community on the 7 actionable steps to get out of debt so if you happen to form part of the £1.625 trillion statistic I quoted earlier on, you don’t want to miss out!
And remember that where you are on the journey to financial security matters less than the direction you’re moving in. Keep going! I’ve got your back.
Kat Kuczynska Transformational Coach & The Founder of Invested ME
Kat will be a guest on KWIB Radio in the next few weeks and if you have any questions you would like to put to her please let us know below.
Kat Kuczynska Bio Kat is the founder of Invested ME, an obsessive mind, a stock market and property investor. Invested ME was created to help people and small business owners improve their finances, to stop living from payday to payday and learn personal finance and investing skills. Kat spent her early career years in the corporate world. She decided to start her own business after being diagnosed with late-stage cancer. As a former promiscuous spender on the brink of bankruptcy, she’s here to prove that anyone can rewrite their financial story and start building the financially secure life they once dreamed of.
All views expressed are those of the author and we accept no liability for advice given.