You may have read in the media a couple of years ago about something called the Slow Food movement. Its supporters believe that the tastiest, most nutritious food is created slowly and carefully. I am thinking of starting a Slow Money movement. Why? Because the best way to enjoy real, lasting wealth is to create it slowly and carefully.
What many people don’t realise is that it is possible to build up a sizeable fortune simply by investing a small amount on a regular basis. Let me give you just one example.
If you started saving €10 a day on your 18th birthday and continued until you were 60, assuming an average annual return of 8% ( and well may you scoff – over the last 7 years the returns were well in excess of that), you would end up with a staggering €1,180,253.
Obviously, it helps if you start saving money when you are relatively young – but it isn’t vital. Follow the simple, straightforward ideas outlined below and you will find that the easiest way to get rich is…slow.
Start with a little financial housekeeping.
The first step to becoming a ‘slow’ millionaire is putting your financial house in order. There are three things you should consider.
Firstly, are you wasting money that might be better used elsewhere? For example, could you save on your mortgage, cut the cost of your utilities or reduce your spending in some area.
Secondly, do you have any expensive loans? There is no point in saving money that would be better used to pay off debts. Few investments earn more than it costs to borrow.
Thirdly, are you budgeting properly? There is much to be said for adding up all your regular monthly outgoings, dividing by 12 and then transferring this sum into a special ‘budget’ account when you get paid. This should help you save cash over the course of the year.
Create a safety net.
Before you focus on the more lucrative ways to make your money grow you should build up an emergency fund. The purpose of such a fund is to ensure that you have cash available to cover unexpected expenses and ideally it should be sufficient to cover at least three months of your regular outgoings. Obviously, you need to keep it where you can get your hands on it but that doesn’t mean accepting a low return.
The best option is an instant access (or ‘demand’) account with a bank or credit union.
Currently rates vary from 0.1% a year (in other words 1 cent for every €100 saved) to 2.54% (€2.54 for every €100 saved) – so it is worth shopping around. You will notice, by the way, that locking your money away for a period (anything from 7 days to a year or more) won’t necessarily increase the amount of interest you earn.
Consider a regular savings plan.
With money in the bank for a rainy day - ideally 3 to 6 months’ joint net annual income - the next stage in your wealth-building plan is to start a regular savings plan. You may like to consider a Regular Savings account with any of the deposit takers on offer. Investors save a fixed monthly instalment of between €100 and €1,000 for twelve months and receive interest of up to 3%. Best of them in Ireland at present is KBC Bank at 3% provided you open a current account with them and EBS at 3% but you commit to saving for those 12 months.
Once you have built up some capital.
After a few years of regular saving you will be in the happy position of having some lump sums of capital. This will open the door to bigger and better opportunities.
An alternative is to invest in a pooled or managed fund investment. Pooled investments come in many forms with names like ‘unit trusts’ and ‘managed funds’ but they all work on the same basis:
Your money, along with the money of all the other people taking part, is pooled and then invested. Each pooled investment fund has different objectives. For instance, one might invest in the largest Irish companies, another in European companies, a third in Korean property and so forth. In each case the ‘fund managers’ - the people running the fund and making the investment decisions - will indicate the type of risk involved. They will also provide you, on a regular basis, with written reports or statements explaining how your money is performing.
Pooled investments are ideal for smaller investors but watch out for the charges that some fund managers make. Remember, too, not all fund managers are good at what they do - so pick your fund carefully. Pooled investments should be thought of as medium to long-term investment vehicles. In other words, you should plan to leave your money in them for an absolute minimum of five years - and more like ten years or even longer.
Many of the insurance companies now offer very simplified managed fund investments based on your attitude to risk – 1 being the most cautious (cash funds, government bonds) and the top category (5 or 7) being the most aggressive (emerging markets, energy and technology stocks etc). You are allowed to swap between the funds for free and then just heed the advice of Warren Buffett - the stock market is a mechanism for transferring money from the impatient to the patient.
One final thought. Don’t forget the benefits offered by Prize Bonds. These are Government securities which, instead of attracting interest, participate in draws for weekly cash prizes. You can encash these Bonds at any time. The amount of the prize fund is determined as a percentage of the value of the outstanding bonds ( 1.25% ) and the winnings are 100% tax-free. You can invest as little as €25 and the largest prize is paid quarterly - €1,000,000.
Before making any financial decision you should always take professional advice.
John Lowe is managing director of Providence Finance Services Ltd trading as Money Doctor, regulated by the Central Bank and based in Stillorgan Co Dublin. He is author of The Money Doctor 2017 – 100 Ways to Save Cash (Gill Books) For consultations and corporate seminars, call (01) 278 5555 or email firstname.lastname@example.org Follow John on Twitter (@themoneydoc). Linkedin Pinterest Google+ & Facebook