Making your money work for you
How to beat inflation, grow your income annually & achieve capital growth
It takes time, hard work and effort to accumulate capital and you will be concerned that you invest it wisely. You want a good return and not lose an opportunity to make your money grow. Equally you want absolutely no risk as you are worried you might lose your money.
Sadly these two aims are irreconcilable. Creating wealth involves deftly balancing risk and reward. More risk means potentially more reward and less risk means less reward.
You need some of your capital accessible for everyday living and spending, for planned expenditure like changing the car and holidays. You also need to allocate money for emergencies and rainy days.
However leaving all your money on deposit could prove costly. You could happily assume that because you deposit £1,000 and are guaranteed the same £1,000 on withdrawal that your capital is safe.
If you have to live on the interest, then inflation will erode the real value of your capital with the ravages of time.
For example, assuming an annual inflation rate of 4% your capital will halve in value over 18 years so that £1,000 is only worth £500 in today’s money. In that sense banks and building society deposits are guaranteed to lose you money.
The danger of fluctuating interest rates means your income will drop when interest rates drop. If rates are lower today than say four or five years ago then you will have to live on less money when you actually need more just to combat inflation. The other threat is paying unnecessary tax.
Many people recognise that to achieve long term protection for their capital and the potential to increase their income annually in the years ahead it is worth considering stockmarket related investments through tax efficient vehicles wherever possible.
Although they can be volatile in the short term and their value not guaranteed, history demonstrates that in the medium to long term they outperform deposits and deliver superior returns well in excess of inflation, keeping your savings ahead of the cost of living.
Records show that if you invest for a continuous period of 18 years (ie 1980-1998, 1981-1999 etc) the stock-market outperformed cash 99% of the time.
Investing in the stockmarket is not just for the investor who seeks capital growth but also an increasing income (dividend) from their investment. This is because profits increase your share of the profits.
Successful companies which increase their profit at a higher rate than inflation are also able to increase dividends (income paid to investors) at a higher rate than inflation, unlike deposits which fluctuate in line with prevailing interest rates.
In addition stockmarket investment also provides the opportunity for growth in the value of your capital unlike deposits. The best analogy is investment in property.
Over time both the rent and the value of the property should increase despite occasional setbacks such as at present, and similarly you should enjoy an increasing income and capital growth from your investments.
Anstey Financial Planning specialises in investment and we can advise you on the best way to organise your investments to reflect your own particular individual circumstances and requirements bearing in mind your attitude to risk.
"It requires a great deal of boldness and a great deal of caution to make a great fortune, and when you have it, it requires ten times as much skill to keep it". Ralph Waldo Emerson
The value of your investment can fall as well as rise. You may not get back the full amount you originally invested.