Welcome to our series on understanding money. We hope this will help you make some headway into understanding, and getting a hold of your financial matters. So far, we’ve looked understanding money in everyday life, how to budget, how to start saving, and how to plan for retirement (or alternatively early financial independence). Now it’s time to look at how to invest your money.
Disclaimer: Since I am not a financial advisor, none of this should be taken as advice on how to invest, and it is therefore only for informational or entertainment purposes only. That being said, I think it’s good advice to anyone to save money, since it’s a sensible thing to be putting money aside for the future, even if it’s just for annual expenses, like saving up for a holiday. Investing is a whole different kettle of fish…
What is Investing?
Investing is essentially putting money into something (e.g. a business, shares, a rental property, etc.) with the hope of receiving money back, specifically more than what you put in. This could be in the form of regular payments to you (e.g. dividends, interest payments, rent, etc.), or selling the investment at a higher price than what you paid in the first place (capital appreciation).
You can also invest in things that aren’t monetarily based. You could invest in yourself – in your own health or education for example. This doesn’t have to cost anything and is really important, maybe more important than investing money. You can get free online courses from edx and Coursera, and free books at the library to improve your own knowledge and skills. You could lift heavy things in your house to build up your muscles, instead of paying a gym membership.
Why Invest My Money?
Some people think they shouldn’t invest, but just save the money in a bank account or “stick it under their mattress” (has anyone ever actually done that?!). But there is one huge problem with that. It’s called INFLATION. Inflation is like having moths in your wardrobe. And you just KNOW they’re going to eat right through your Sunday best clothes. Because moths don’t like your cheap as Tesco work shirts, they want to eat through your best suit and tie. Inflation is exactly the same. It eats your money when you’re not looking, and when you’re least expecting it. Inflation is when prices increase, so things are more expensive than they were last year, last month, or even last night!
Now, don’t go thinking that it can’t happen overnight, because it can, and it has, even in our lifetime. It’s called hyperinflation, and it’s inflation’s badass big brother who’s going to eat you alive and then beat you up, in that order. Okay, not really, but you get where I’m coming from. Some of you may remember learning about the hyperinflation of the Weimar Republic in Germany or during the American War of Independence, but it has actually happened in our lifetime too – Zimbabwe in the late 2000s, Yugoslavia in the 1990s, and Iraq in the late 1980s. In the case of Zimbabwe, when hyperinflation was at its worst (November 2008), prices actually doubled every 24 hours and 42 minutes. So, that would be like you going shopping at Tesco at 12 noon and buying your two pints of milk and loaf of Hovis for £2.47. The next day, you go at 12:42pm and buy the two pints of milk and your loaf of Hovis but it now costs £4.94!
The chances of us seeing hyperinflation are slim to none right now, but we do have low levels of ordinary inflation. We’ve been seeing just a few percent per year recently, and lately, as was reported in January, 0.5% for the UK (CPI measure of inflation). So basically in a year’s time, your two pints of milk and loaf of Hovis are going to cost about £2.48. A penny is hardly going to break the bank now is it? The main problem with normal inflation is when it is a bit higher, but your wages are not going up at the same time, so you’re essentially having a paycut.
How to Beat Inflation
One way to beat inflation is to invest. You could invest in companies that make items such as everyday foods, clothes, and toiletries. The companies would pass on the higher costs to the customers, in order to keep making money. You, as the investor of that company, would then (theoretically) receive a higher dividend from the company. Here are some examples of such companies:
- Reckitt Benckiser (RB)
- PZ Cussons
- Johnson & Johnson
- Procter & Gamble
You have probably heard of most of these companies, as they make lots of famous brands that we see for sale every time we go shopping. And in case you’re wondering about the second one, Reckitt Benckiser make things like Colman’s mustard, Dettol, and Nurofen. Beating inflation with these kinds of shares is, of course, not guaranteed. Dividends could be cut, lowered, or raised according to company performance. However, dividend growth investing often involves companies like these, that produce everyday consumer goods, since they have some of the longest histories of rising dividend payments (Johnson & Johnson is a great example). If you want a list of UK stocks according to years of dividend history, check out Dividend Life’s website. He maintains the list every month, yippee!
Isn’t Investing Risky?
Yes. Now, there’s an answer a politician can’t give you. Short and sweet! Yes, investing is risky, but walking across the street is also risky. You could be hit by a car, or in my case, by idiot cyclists who don’t look anywhere but forwards, and never stop at red lights (CURSES!!!!). The important thing is that we need to be aware of the risks that face us in everyday life, and that includes the risks to our money. This is why we set up this website in the first place, to document our ideas, goals, and progress towards making valuable and purposeful decisions in life, particularly with regards to our money. Part of this process is trying to evaluate the risks that might affect us in our health, our wealth, and our everyday happiness. The important thing is to investigate risks alongside our pursuit of various opportunities, so that we are aware of the risks, and then can take action to mitigate them. We cannot go through life living in a giant ball of cotton wool.
How to Invest – 3 Simple Steps
- Open an investment account (UK – a Stocks and Shares NISA)
- Put some money into it
- Buy something cheap and simple
Could it get any easier than that? Okay, so there are a few things to note.
1. When you open an investment account, you don’t want to be paying excessive charges, so first, check out the information behind Monevator’s comparison chart of cheap brokers, then follow the link to their comparison table. The reason for this is that the Monevator site does a great job of explaining the differences between costs of brokers – some charge a flat rate to have an account, some charge a % fee per year. They all have varying dealing costs, so you want to make sure that you get a good value one, that suits your needs.
2. It’s a good idea to put money in regularly, you could set up a standing order for a few days after payday. This doesn’t mean you have to make an investment ever month, but you can leave money in your account for a while and then invest it later. This is what I do with my little one’s account, as I only put £30 in per month. So, I just let it accrue for a while and then make a purchase a few times per year.
3. A cheap and simple option to begin investing is a Vanguard LifeStrategy fund. They come in different flavours depending on how much you want to split between stockmarkets and bonds/gilts e.g. LifeStrategy 80 would be 80% invested into a diversified selection of global stockmarkets and 20% in bonds/gilts, whereas Lifestrategy 40% would be 40% stocks, etc.
Well, that’s all folks. Let me know what you think. Is investing just ‘gambling, but on the stockmarket’? Do you invest? What’s the simplest way to invest? Let me know, leave a comment below.
photo credit: bplanet/freedigitalphotos.net