Welcome to the third instalment in this week’s Young Money Guides, in association with Investors Chronicle. Today, we’re looking at investing your money for the longer-term, and whether the stock market is a potential path to riches…
Saving is important if you want to get rich, but there’s a much faster way to grow your money – investing. Investing is an essential tool if you want to get rich by the time you’re 50 because it gives your money more potential for growth.
If you’re looking to grow your money, one of the major problems with saving is a huge and unstoppable beast that will eat into your money and devalue it over time. That beast is inflation. So what exactly does it do? Let’s pretend you want to buy a pair of £100 headphones, but you are going to wait until this day next year. So you put £100 in a savings account with a 3 per cent interest rate and wait. What will happen to your cash? Well, because the current rate of consumer price index inflation is 2.8 per cent, that means that in a year’s time, your money will be worth 2.8 per cent less than it is today. So, although the interest will turn your £100 into £103 after a year, in today’s money it’ll only be worth £100.80. That means you can still afford the headphones, but only just. This is pretty lame.
If you want to beat inflation, investing is a much more effective tool than saving – and we’ll come on to why in a second. Now, forget the headphones we just talked about – because you’ve got much bigger fish to fry. Investing can help you reach your life goals faster than saving – and if you’re in your 20s – the one that probably springs to mind first is buying a house. But if you’re a first-time buyer in the UK, on average you’ll need to stump up a £31,000 deposit (source:
Council for Mortgage Lenders). Most people don’t manage to save this much until they’re in their 30s – and many will never manage it. Let’s look at how much faster investing £200 a month can grow your money than if you’re saving the same amount in a cash individual savings account (Isa) over a 10-year period.
Investing in the stock market can help you achieve this much faster. As you can see from the chart on the next page, a £200 monthly investment into the FTSE All-Share over the last 10 years would be worth £36,680 now compared with the £26,400 you’d have if you’d invested it in a high street cash Isa. So the difference between saving and investing could mean years between you being stuck renting and affording your first home.
So, how is investing different to saving? It’s actually quite simple. When you save money it sits in the bank and the bank give you a bit of interest, which makes it grow. But when you invest money, it is not just sitting in the bank. What you are doing instead is handing over your cash to buy assets that rise and fall in value over time. After you buy them, they will either lose or gain value, so when you decide to sell them in the future they will have either stayed the same or generated a profit or a loss.
There are many different types of assets you can buy and we will take a closer look at them soon. Collectively we refer to them as the stock market.