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One of the great myths of investment is that you need an MBA, a
Porsche and access to lots of cash before you can take part.
Fortunately nothing can be further from the truth and with the
right long-term approach; almost anyone can become a millionaire
investor.
Long-term investment strategy
In short, this article will explain a low-risk investment
strategy that could allow you to retire younger, travel more,
buy expensive cars, pay off your mortgage or simply enjoy a
comfortable lifestyle with a greater level of financial security.
Other investment strategies might provide greater returns in the
short-term, but will require a significantly higher investment
and much more risk.
Understanding the importance of compound returns
When you put money into the bank, you earn interest on your
savings. The next month, you will earn interest on that interest
as well as the money that you originally put in.
This cycle will continue each month and as long as you do not
take any money out of your account, you will be earning
increasingly higher amounts of interest, on top of your original
contribution.
The same principle applies to investments in shares and
investment funds. By re-investing dividends into the purchase of
additional shares or funds, you will be able to generate
additional earnings, which you can then re-invest again and
again.
Turbo boosting your compound returns
You can improve the performance of your compound returns by
adding additional contributions to your savings account on a
regular basis and by selecting investments that provide higher
annual growth rates.
The powerful effects of compound returns are best seen over a
long period of time. The table below shows the returns that can
be achieved by making monthly contributions of £100 over a
period of 40 years.
Note how small differences in the rate of return have a huge
impact on the final figure.
Rate of return 5% 8% 12% 15% 20% Age 20 0 0 0 0 0 Age 30 £15,499
£18,128 £22,404 £26,302 £34,431 Age 40 £40,746 £57,266 £91,986
£132,,707 £247,619 Age 50 £81,870 £141,761 £308,097 £563,177
£1,567,625 Age 60 £148,856 £324,180 £979,307 £2,304,667
£9,740,753
Maximising your rate of return
In the above table we can see how a combination of regular
contributions and an ability to find investments that provide a
high rate of return will literally turbo boost your savings into
the millions and it is important to understand how to obtain
these results.
Below are four good places to start:
1 - Ditch the bank account
Most of us have a savings account, but often the interest rate
on savings is less than 4%. Consider other places to invest your
money, where you are more likely to get a better rate of return.
Why not invest your money in stocks and shares, where a rate of
return between 8% to 12% is not unreasonable?
2 - Start saving and investing ASAP
The earlier you start, the greater the effect of the compound
returns. Many people put of saving when they are younger,
because they feel they cannot afford it, but try to understand
the power of small amounts.
Small, regular contributions will soon begin to grow into a
healthy pot of money. Even if you can only begin by saving £30 a
month, this is still better than nothing and as you begin to
earn more money, you will be able to increase your contributions.
3 - Buy cheap financial products
Did you realise that charges for financial services can vary
enormously among different banks and investment houses, so take
care when choosing investment products and make sure you compare
prices.
Expensive charges will lower your returns and reduce the
compound effect.
4 - Learn about tax efficiency
The banks are not the only ones looking to profit from you. The
tax man will also want his cut and this can lead to some serious
wealth reduction.
However, there are a number of ways to minimise the affects to
tax, such as taking out an ISA (individual savings account),
which is a tax free vehicle to keep your savings and investments
in.
The importance of clearing debts
We have seen the positive effects that compound returns can have
on your savings and investments; however there is also a darker
side.
In the same way that banks pay interest on savings, they also
charge interest on loans and credit card debts, and with some
minor exceptions the interest charged on debts is much higher
than that rewarded for savings, so it is the bank who will be
benefiting from compound returns at your expense.
One big mistake people often make is to carry credit card debts,
whilst keeping money in their savings accounts. This does not
make sense because the savings may only be earning 5%, whilst
the debts are costing 15%.
It is much better to concentrate on clearing your debts as soon
as possible and then harness the power of compound returns in
your favour.
Here's to your investment future
Remember it is possible for almost anyone to a develop a
substantial investment income, just bear in mind the the
positive and negative implications of compound returns, the
importance of clearing debts and the benefits of turbo boosting
savings and investments.
Investment is a great way to increase your wealth. For more investment advice and information on
managing your money, visit www.Finance4Beginners.co.uk
About the author:
Investment is a great way to increase your wealth. For more investment advice and information on
managing your money, visit www.Finance4Beginners.co.uk
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