10
9
8
7
6
5
4
3
2
1
1
Page 5 The Motley Fool’s Ten Steps
chosen methods that return different annual growth rates and they
each contribute £100 per month until they’re 60. Let’s look at the num-
bers:
Fenella Felicity Freda Faith Florence
5% 8% 12% 15% 20%
Age 20 0 0 0 0 0
Age 30 £15,499 £18,128 £22,404 £26,302 £34,431
Age 40 £40,746 £57,266 £91,986 £132,707 £247,619
Age 50 £81,870 £141,761 £308,097 £563,177 £1,567,625
Age 60 £148,856 £324,180 £979,307 £2,304,667 £9,740,753
As you can see, even small differences in the rate of return have a
huge impact on the nal pot.
Now let’s introduce you to Fay, a Foolish young woman who, on her
20
th
birthday, sensibly decides to invest £100 a month into an index-
tracker ISA (more on these later). For the purposes of our example, let’s
say it appreciates at a rate of 12% a year – a not unreasonable estimate,
although bear in mind that we haven’t taken ination into account. At
the age of 30 she marries Ferdinand, stops work to have children and
cancels the direct debit into her ISA.
Ferdinand, meanwhile, who has frittered away his money and his
twenties on pastimes too terrible to mention here, decides on his 30
th
birthday to start contributing the same £100 a month into the same
scheme and continues until he is 60. The numbers pan out like this:
Fay Ferdinand
£100pm Age 20-30 £100pm Age 30-60
Age 20 0 0
Age 30 £22,404 0
Age 40 £69,582 £22,404
Age 50 £216,112 £91,986
Age 60 £671,210 £308,097
Ouch! Extraordinary, isn’t it? Fay only contributed for 10 years and
yet she’s got more than twice as much as her husband. So it’s not just
The Motley Fool’s Ten Steps Page 6
the size of the returns that are important – it’s how soon you start saving
too!
Just think what a difference it could make to your life if your sav-
ings work for you in this way. Seeking out the best returns on your
money, which generally means keeping the costs as low as possible, could
make literally thousands of pounds worth of differ-
ence. Many of the products we buy have high charges,
and these charges cut a big chunk out of the money
we’re trying to save. So, beware! And the sooner you
start, the more likely it is that you’ll be able to pay off
your mortgage early, or retire sooner. And small sums
soon build into bigger ones so don’t worry if you can
only save a few pounds a month. It’ll soon grow. The
trick is to get sorted and start saving.
So, think about where you keep your money and
what you can do to make sure that you are getting the
best from it. A good place to start, for example, is with
your bank. Almost all of us have a bank account, but
we often don’t think about whether we could do better
elsewhere. So, start by looking at your bank account to see if it’s really
doing its best for you: take note of the interest rates printed on your latest
statement. And do it now!
“And small sums
soon build into
bigger ones so don’t
worry if you can
only save a few
pounds a month.”
Page 7 The Motley Fool’s Ten Steps
Step Two - Dump Those Debts
The Miracle of Compound Returns can be a fantastic thing when
you’re saving or investing money. Unfortunately it works in reverse
when you’re borrowing money and it explains why debts often spiral out
of control.
Take credit cards, for example. They’re very useful things if we have
to borrow money but if it’s got a high interest rate and you can’t afford
to pay off much each month, then it’s the credit card
company that is getting the benet of compound
returns. And we don’t want that, do we?
In fact, did you know that the average debt in the
UK is £2,500 per person? For most people this bor-
rowing probably has an interest rate of at least 15%.
That amounts to £375 per year in interest alone. To
some people, £375 may not seem like a lot of money,
but think of it this way: if you lost your wallet and
it had £375 in it, would you be upset? Of course you
would! Apart from anything else it’s the price of a
week’s holiday in one of Europe’s cheaper and sunnier
climes – but instead we’re freely giving it away to SpendULike Finance
or BuyNow Plastic! And if we only ever make the minimum payments
“ did you know
that the average
debt in the UK
is £2,500 per
person?”
10
9
8
7
6
5
4
3
1
2
2
The Motley Fool’s Ten Steps Page 8
on our credit cards, then the compound returns for the lender just grow
bigger and faster.
Another thing we often do is carry debt on our credit card while
accumulating savings in the building society. This doesn’t make sense
because if the savings are only earning, say, 5% but the debts are cost-
ing 15%, then we’ve got a shortfall of 10%. Say you’ve got £1,000 in the
building society and debts of a similar amount. The interest on your sav-
ings would only be about £50 per year, while the debt would be costing
you £150. It makes no sense at all; far better to use the savings to pay off
the debt and start again from scratch so that our savings are earning real
returns.
As it happens, the Motley Fool’s debt discussion board is peppered
with people looking for help after realising that years of out-of-control
spending have resulted in them being thousands of pounds in debt –
and that’s not counting the mortgage. So if you’re in this situation, you
are not alone! Banks and credit card compa-
nies are so eager for your business that
they’ll raise your credit limit without
you even having to ask, or they’ll
offer you special deals like cash-
back. Credit is not credit – it is
debt! The only time it makes sense
to borrow money is when you buy a
house, because there’s usually no other
way of being able to afford it and the inter-
est rate is generally pretty low.
So, we know you’re on the information superhighway and all
that but, when it comes to saving and investing money you’ve
worked hard to earn, you really need to obey the rules. It’s time to
dump those debts before you do any form of saving.
Be tough with yourself and take a good look at your nances.
Page 9 The Motley Fool’s Ten Steps
How much do you earn, after tax each month?
What are your outgoings each month?
What’s left?
If the “what’s left?” is negative, you’re obviously being unreal-
istic. You are living above your means. So rein in your spending
for a while and think about where the money’s going. And even if
your ‘what’s left’ amount is positive, you still may be wasting money
somewhere. Remember the more you can save for the future, and the
sooner you start, the better off you’ll be. The Motley Fool’s Get out
of Debt Centre will take you through the process of working out your
overall nancial position and show you how to get a better deal for
your money.
The Motley Fool’s Ten Steps Page 10
Step Three - Bricks and Mortar
One day you’re probably going to want to buy a house. Maybe you’ve
already bought one. Either way it’s most likely that it’ll involve a mort-
gage, which is the one debt many of us have to have because we’d never
be able to afford to buy our home otherwise. Fortunately, mortgage pro-
viders are prepared to lend people money at a reasonable rate, and it is
usually a far cheaper way of borrowing than almost
any other form of debt, because it is secured against
the value of the property.
That’s all there is to a mortgage: it’s a very cheap
means of borrowing money to buy a house or at. The
principles are simple. The problems come in paying
back this borrowed sum. First of all you have to pay
off the interest on the loan each month. There’s no way
around that. Then you have to decide how to repay the
initial sum you borrowed.
You have a choice. Do you want to pay the loan off
gradually during the term of the mortgage (a repay-
ment mortgage), or do you want to invest a little each
month somewhere and pay off the sum in full later on when you’ve built
up a pot (an interest-only mortgage)? Each one is just a different way of
“That’s all there
is to a mortgage:
it’s a very cheap
means of borrow-
ing money to buy
a house or at.”
10
9
8
7
6
5
4
2
1
3
3
Page 11 The Motley Fool’s Ten Steps
reaching the same objective.
Follow the repayment path and part of the cash you pay each month
will cover interest on the loan, and the rest will pay off a portion of
the capital sum you initially borrowed. Gradually, over the course of
the mortgage, you will own a greater and greater share of your home.
Think of it as buying your property one brick at a time.
Go down the interest-only road and you will have the amount you
borrowed outstanding for the whole term and will only pay off the
interest each month. At the end of the term you’ll need to nd a lump
sum to pay off the capital and the usual way is to invest in the stock
market by drip-feeding monthly payments into a special fund.
Whoa! Did we just say stock market? Don’t panic! This is how an
interest-only mortgage works and there are good reasons for this. His-
toric studies show that the stock market has provided a greater return
than any other investment over any 20-year period in the past century.
(Don’t worry, we’ll explain more later.) So, with this cash working for
you, rather than buying a brick each month, you’re hoping to make a
big enough pot at the end of the mortgage term to pay off the capital
sum.
Admittedly, our rst Foolish mantra is that you should always pay
off debts before you invest. However, like it or not, that’s what you are
doing with a mortgage – investing – whether you pay it off early with
cash (via a repayment) or later on with returns from shares (using an
interest-only loan). You are after all buying an asset – a house – with
this loan. As always, you’re trying to get the best possible deal, and our
guide to mortgages should help you to do that.
The Motley Fool’s Ten Steps Page 12
Step Four - Hurrah – No More
Work
Let’s face it, few of us want to get old. What we do want, though, is
some sort of plan to make sure that, when our pay cheques dry up, we’ve
got a big enough pot of money for us to do the things we want.
So, usually we look for some sort of pension plan and pay into it
on a monthly basis until it’s time for us to retire. Your pension fund
manager invests it in the stock market and, on retirement day, hands
you the pot of money he’s managed to
make for you – less his fees and
charges, of course.
The trouble is sometimes that pot
of money isn’t enough to pay for 20 or
30 years of easy living and it’s usually
because we’ve thought about things
the wrong way round. We tend to
think about now rather than then.
Not surprising, really, as it’s rather
hard to see into The Future,
but The Future is actually
10
9
8
7
6
5
3
2
1
4
4
Page 13 The Motley Fool’s Ten Steps
where we should start so we can then work backwards to the Here and
Now.
What we need to ask ourselves are these questions:
1. When are our pay cheques likely to stop?
2. What is it that we want to have and want to do in retirement?
3. What would be enough money for us to achieve this?
4. How are we going to go about getting this pot of money
together?
Providing for your retirement means balancing a number of factors,
and it’s important to see it this way from the start. The earlier you want
to retire, the fewer years you have in which to save your pot of money.
And, of course, the less time you have in which to save, the more you’ll
need to put aside each month.
You might say that you should save as much as possible so that
you can simply retire when you decide that you have enough. Unfortu-
nately, this makes little sense either. What is saving as much as possi-
ble? Should we live on cornakes and take no holidays until retirement?
It might enable you to retire early and with a huge pot of money, but
it wouldn’t do much for your health and you probably wouldn’t know
what to do with the money when you did retire. Similarly it would be
miserable to retire with a much lower income than you’ve got used to
living on. So, you have to live for the present and save
for the future. Putting together a retirement plan is
about striking a balance between the two.
The answer is to aim for a retirement that main-
tains the standard of living that you’ve got used to
during your (and/or your partner’s) working life.
There is no point in saving extra to give yourself a
higher standard of living in retirement since, apart
from anything else, you may not make it that far. It
would also be miserable to spend your later years having to cut back on
the luxuries that you had got used to.
If you are able to answer a few of the “what if” questions ahead of
events, then you’ll be in a far better position to deal with things if the
“Should we live on
cornakes and take
no holidays until
retirement?”
10
9
8
7
6
3
2
4
1
5
4
The Motley Fool’s Ten Steps Page 14
“what ifs” actually come to pass. What if I get made redundant in my
early fties and can’t nd another job? What if I decide to have more
children and need to take career breaks? What if my investments don’t
grow as quickly as I’d expected? How likely are these things to happen?
A good retirement plan takes into account these sorts of events, and
their likelihood of occurring. So, at every stage of the planning process,
you need to be thinking not only about what you expect (and/or hope)
to happen, but how likely it is that things will work out differently and
by how much. A good plan is also monitored and tweaked, as the “what
ifs” turn into “whens” or “denitelys”.
In fact, many of us have pensions, through work or privately, but
these are unlikely to provide the full answer to our retirement needs and
some people will nd that other forms of saving, like the ISAs we talk
about in Step Eight, will serve them better. One thing is for sure: pen-
sions are complicated beasts, so pop over to our Pensions Centre to get
the Foolish lowdown.
In the meantime, there is another way to help provide for your retire-
ment and it involves investing in the stock market yourself. This may
seem a bit daunting but it truly isn’t, and it’s not that difcult to do. So
be brave and move on to Step Five as we unveil all that is mysterious
(Not!) about the stock market.
Không có nhận xét nào:
Đăng nhận xét