Articles

INVESTING

Let's Talk About Saving Vs Investing

BY IMY VINNING

Monday 17th May 2021

The infamous Warren Buffet echoed the following quote; “If you don’t find a way to make money whilst you sleep, you will work until you die”. This article will give you a brief insight into how you can make money whilst you sleep.

It is indispensable to outline the main benefit of investing your money; having money saved and sitting in a bank account is excellent, however, whilst the inflation rate is increasing the value of your money is also decreasing in value. Why? The government keeps the inflation rate around 2% a year, which means on average the prices are rising by 2%, in turn, devaluing your savings. On the other hand, the stock market has historically increased by around 7-10% per annum since the 1970s. This, therefore, means you are not merely making your money work for you, but you are keeping the value of your money worth above inflation, on average, by 5-8%.

The stock market may not be for everyone therefore, it is vital to understand both the benefits and the risks associated with investing.

So, what are the benefits of investing?

The magic of compound interest also comes in at the top. The beauty of compound interest is, in simple terms, making your money make more money. The graph below illustrates two scenarios where you have saved £500 per month for 1 year (£6,000 altogether). In scenario 1 (green line) you decide to put your savings in a savings account with a bank that have offered you a fixed 1.25% interest rate per annum (I don’t think the rates are even that high at this moment in time). After 30 years your £6,000 will accumulate to a whopping £8,710 - a surplus of £2710. In scenario 2 you invest your money into the stock market which has had an average annual increase of 7-10% (for the example I have used the figure 8%) - over the same 30 year period your money has accumulated to £60,376. The example demonstrates the power of compounding and even more so in the stock market.

Another example of compounding is if you continued contributing £500 every month to your investment account for the 30 years. Instead of investing only £6,000, you would have invested £180,000 over the 30 years and with the current average stock market return of 8% your money would accumulate to £1,811,278. So you could be a millionaire by the time you retire.

We have already discussed inflation in the introduction, and the magic of compound interest. However, there are numerous other benefits; income for your retirement, passive income from dividends and owning small segments of companies you love - Peter Lynch is famous for saying “invest in what you know”.

What do you need to be aware of?

After reading the above you may be thinking to dive straight in and reap all of these benefits and become a millionaire. Yet, you should also understand the volatility associated with the stock market and how to manage your fears and expectations. You must understand the different products available which help you maximise your returns. Finally and most importantly, you should understand the difference between investing in the short term and investing in the long term.

Investing in the short term may reward you with an overall loss because of stock market volatility. My example above illustrates what will happen to your money, if invested, over a long period rather than a short period. Therefore, if you need money in the short term (3-5 years) you need to think carefully about what is immediately available to you and whether investing your money is the most sensible idea for you. This is why having your financial affairs sorted is crucial; having an emergency fund/f**k off fund will allow you to reach financial freedom.

To reap the benefits outlined in the article, you will need to make smart decisions, steady your work, be committed and be patient. SHEINVESTS will provide you with the tool kit to be all these things and help you become financially free. So stick around and we will talk through how you can create a f**k off fund - the first step to starting your investment journey.


IMY VINNING

Imy is the founder of SHEINVESTS and is on a mission to provide a solution to the gender investing gap. Imy has created a space where all financial jargon is decoded so everyone and anyone can understand and learn. Imy has a degree in Economics and has also worked in investment sector since she graduated. She has been fascinated by the way markets move since the inception of her degree.

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