Budget and be a long term investor
You may have a clear lifepath in mind or be like I was and have no idea of your future career. However, certain things are in your control, such as:
- Understanding how much money you have
- How much you receive each month/year
- How much you spend
As you go through your career you are likely to see 2 and 3 both increase. You will probably look back at your early 20s when you are older and think, how did I manage to spend so freely back then!
Many people spend very little time thinking about their finances. They don’t have an understanding about 2 or 3 and end up spending everything, or even worse, having to borrow money and getting into trouble financially.
Information is key
Information is key to successful financial planning and recognising that it takes time to plan properly is step 1. Step 2 is to spend enough time monitoring your finances to look at your income and outgoings. Then when you spend money in the future you can see be sure that you can afford it. Not only does this make good financial sense, but it will also give you peace of mind.
I would also suggest looking at your yearly spend and trying to save for the one off costs, such as car insurance or expenses, on a monthly basis. It is far easier to find £1,200 for a holiday by putting aside £100 per month, than it is to find £1,200 in one go!
Budget, budget, budget
It does not take long to budget each month, you can use an excel spreadsheet to note down all your expenses. Try to plan for the month moving forward and for discretionary spending, such as food, or going out, be honest with yourself and over plan what you need. It is better to expect to spend more than you do and have something left, than to overspend and run short.
If you can budget successfully throughout your life and start to see number 2 (how much you spend) getting ahead of number 3 (what you earn) then number 1 (how much money you have) will start to increase.
Try not to spend what you earn
There is the tendency to spend what you earn. Step 3 is to put money away each month, via standing order, as part of your budget. That way you do not see the money in your account and you do not spend it.
If you can put money away regularly, over years, then you should see the value of your investments grow substantially.
Einstein was asked what is the world’s greatest invention and it is is claimed he simply replied “compound interest.” If you can invest money regularly for many years and make a return on it then you will be surprised at the eventual outcome.
Compound interest
Let’s look at an example:
£50 per month invested for 10 years earning 5% interest would be worth £7,764.11. Who knows where you will be in 10 years, but having this behind you would likely prove useful.
If you can increase the amount you save each year, by say 10% then the returns increase further.
£50pm invested for 10 years increasing the figure saved by 10% each year would equal £11,951.22.
If you kept saving and increasing by 10% and making a 5% return after 20 years it would equal £50,682.79 and 30 years you would be sat at £163,877.78.
Investing for the long term and understanding your money can lead to your wealth growing significantly over time.
For more information about investing for beginners, click here.
A blog post by John Findlay
John is a financial planner at Bray Wealth Management and has been advising for 12 years. He has seen what makes a good financial plan and wants to pass this knowledge on to help people with their own life planning and finances.
For more on the above and other money subjects, check out the Your Money Matters here.
