Investing for your life

So you're considering leading a life with the climate in mind. You've shunned consumerism and started focusing on the things that really make you happy. Great! But what to do with all that extra cash you're saving?

Create financial security and invest.

The path to wealth is made through owning assets - something that goes up in value over time. A house is usually an asset while a car, generally, is not. Most of the things you own in daily life depreciate in value over time. We're looking for things that appreciate.

Wow, one step at a time please - we can't just throw money into the stock market straight away. We need a stable financial platform to do this first. We need to: 1. Build up an emergency fund, 2. pay off any high-interest debt (except mortgage). 3. Contribute to employer-matched pension contributions.

Steps 1,2 and 3 above ensure that you create a base level of financial security before you invest. Perhaps I'll cover more about these in future blogs, but an emergency fund should cover at least 3 month's expenses and high-interest debt should include any credit card debt, personal loans and car finance. You should even consider paying off student loans early, especially if you're on a high income.

Isn't it obvious to pay into an employer-matched pension scheme? Make sure to contribute up to the employer match; they're giving you free money(!). A pension is also an investment - which I'm not sure a lot of people realise (and is the main investment a lot of people own). Make sure you know where your pensions are invested if you've had multiple jobs and consider consolidating them into one pot. Also (IMPORTANT), consider the fees you're being charged (yes, pension providers will take a percentage of your money every year, in return for managing it). Fees eat into your gains - keep them low.

The eighth wonder of the world

Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it…he who doesn't……pays it." Let's provide an example of how it works:

(all examples below from the brilliant Investment Return & Growth Calculator at https://smartasset.com/investing/investment-calculator#x6y0KbNGkG)

Saving

Putting $10,000 into a savings account at 2% interest will give you just over $18,000 after 30 years.

Investing

Investing $10,000 into a low-cost index fund tracking the global stock market will give you $100,000 after 30 years! The average rate of return is given at 8%, in line with historical returns.

So, after a lifetime of investing, you're likely to be five times better off than if you'd just put your money into a savings account. When you invest, your asset grows via compounding (when you earn interest on top of interest). Because the growth is exponential, only a small difference in interest can result in a huge difference over a long time.

Let's create a more realistic scenario:

You may have a lump sum to begin with ($10,000), but it's unlikely you'd never contribute anything to this ever again. Even a very reasonable $500 saved per month will make a HUGE difference over a lifetime.

Saving only $500 per month will allow $74,500 to accumulate in interest over a lifetime.

Investing

And consistently investing that same $500 into the global stock market will yield $665,000 in interest!

The conclusion is clear - investing is FAR better in the long term than saving. Here's the kicker: a middle-income couple in the UK should be shovelling £2000 into the stock market every month, at least. In the US, this number might be twice as high. This is easy if you stay focussed and maintain discipline.

"But what should I do with all this money?" I hear you cry.

Buy back your time.

Become financially independent and do what you want with your own time. You might also choose to be incredibly generous, donating to your favourite charity or helping out friends and family. You might even choose to set up your own business. If you're earning a higher income, even better - you have the ability to reach these goals even faster.

By owning and wanting less stuff - less than the average person - and investing consistently into the global stock market, you'll be able to retire years ahead of everyone else. It's quite literally investing for your life.

It doesn't even have to be that much of an extreme lifestyle - you just have to be slightly less consumeristic than average and the difference will compound over the years.

So hold on to that temptation to buy a new kitchen or car - it will likely fade over time anyway - invest the money and you'll quickly find yourself laughing at people driving about in massive SUVs while your finances are being pushed ever upward on the road to success!