Despite what politicians and bankers often say, the world will never usher in a new financial era in which boom and bust have been abolished. I wish this age could exist, but wishes don’t turn into investment success. The rules of investment that I lay down in this book must catch up sooner or later.
Everyone who tried to convince me that we were into a new world with new rules probably earned 10 or 100 times as much as I did. But they could take this devil-may-care attitude because they were playing with other people’s money (known as OPM or opium). They didn’t care what happened because they made sure that they were number one. By the time it went horribly wrong, they’d made their cash and locked it away somewhere impenetrable.
The morals of all this? Don’t chase fads. Never assume a quick or easy route to riches exists. And never give up the day job, no matter what someone offers!
Before you start investing, take a long, cool look at your personal wealth. Draw up a balance sheet (Figure 2-1 shows an example) so you can check how much comes in each month from work, interest payments, dividends and/or pensions. Then look at where the money goes.
Figure 2-1: Use a balance sheet like this one to keep track of how much money comes in each month and where it all goes.
Repeat this exercise over three to six months so that you balance out low-spending months in one category with months in which you had to lay out a lot. Also take into consideration months in which a big bonus or overtime payment boosts earnings. Averaging means you even out these peaks and troughs.
Investing involves taking chances. Serious investing, as opposed to taking a wild punt on a short-term stock market move, ties up your money for a length of time. Assuming that you have some spare money (see the preceding section to find out whether you do), think about how investing it rather than spending it will affect your household.
Weigh up the happiness quotients for all concerned. For example, compare spending the money now on piano lessons with investing it for later use on university tuition fees. I don’t pretend this is easy.
Talk over investment strategies with adult members of your household. You’ll feel much better if you get them on your side. But if they aren’t happy with your strategies and you can’t convince them then hold back.
Almost everyone can save some money without sacrificing too much lifestyle. Even small amounts each day can soon mount up. Here are some initial ideas – and how much you can save each week:
✔ Give up smoking. A person who smokes 20 cigarettes a day will save £60 a week.
✔ Buy milk at the supermarket instead of using home delivery. You’ll save £6 a week.
✔ Take a sandwich from home instead of buying one at work. You’ll save up to £15 a week.
✔ Go shopping with a list and stick rigidly to it. You’ll save at least £10 a week – and probably avoid some fattening snacks as well.
✔ Ditch pricey cable or satellite TV stations you hardly ever watch. You’ll save £3 to £10 a week. Freeview has more channels than you can watch.
✔ Put every £2 coin you receive into a box. When you have £50, put the money into a special bank or building society account. I did this when I was saving for my bike. I put away over £800 without noticing it.
✔ Buy a copy of Sorting Out Your Finances For Dummies (published by Wiley). You’ll save yet another fortune each week!
Think about your lifestyle and then make your own additions to the list, from saving on transportation (walk? cycle?) to checking the market for gas, electricity, mobile phones, landlines and broadband, and always using a comparison website for insurance policies. You can create big savings with some discipline – it’s the same style of discipline you need to be a winning investor.
Pennies really can turn into pounds and pounds into thousands. And they can grow even faster thanks to compound interest, which is interest on interest.
Suppose, for example, that you manage to save £10 a week and put it in the bank. That’s more than £40 a month and £520 a year. These sums can start you on an investment habit.
Here’s how much various weekly savings would be worth after five years with a modest 2.5 per cent interest paid each year.
✔ £10 a week: £2,733
✔ £15 a week: £4,099
✔ £20 a week: £5,466
✔ £30 a week: £8,199
✔ £40 a week: £10,932
✔ £50 a week: £13,665
None of us knows how much time we have left on this planet. The good news is that your chances of living longer have never been better. Most people nowadays are likely to live to around 77 to 82 years of age. The bad news? You can never forecast when you’re going to be hit by a bus or succumb to a mystery virus.
So you should always make sure you have sufficient life insurance and cover to replace at least some of your income if you succumb to a serious illness or worse. Life insurance won’t replace you, but it will replace your money-earning capacity.
Always shop around for all insurance. Look at any comparison site. You can easily pay twice as much for life cover of exactly the same amount with one company as with another. What’s the difference? Nothing. You have to die to get a payout with both, so the conditions are identical. No one wants to buy insurance – it’s not fun – but if you have to then don’t waste your cash.