The biggest money mistake I see

Being a Financial Planner, I meet many different types of people all with interesting backgrounds and very personal objectives.

Unfortunately many of them suffer from the same money mistake; failing to act early enough.

It is common for me to hear people say, “if only I started sooner”.

You see, the problem is that we can all be guilty of prioritising the short term to the detriment of our long term financial security but the sooner we start saving the more we will benefit in later life when we are reliant on our personal resources to provide an income.

By starting as soon as possible you benefit from compound interest on your returns, that is interest on the interest already received as well as on the original capital and this has a significant effect on the long term growth on capital.

This myopia is not constrained to those that fail to act but also those who act inappropriately.

What I mean by this is some people decide they need to think long term but are nervous about losing capital and so stick to savings accounts for their money.

This has two disadvantages; firstly, inflation and tax will erode the real value of capital over time.

For example £1,000 in 2001 would be worth only £735 assuming a net interest rate of 0% after tax. If it were saved in 2001 it would only be worth £567.

In other words the purchasing power of your savings reduces over time so it needs to be invested in real assets (typically shares, commodities and property) if it is going to maintain value in line with inflation.

Secondly, there is an opportunity cost to missing out on higher returns.

Of course, capital that is invested can fall in value and many investors have experienced this over the past five years but there is enough historical data to support the fact that over the long term real assets, and in particular shares, provide a better return than other asset classes; namely cash, fixed interest securities and property.

And, if you are reading this thinking that you will wait until the economy has picked up and we get some good news, when will that be?

What specific indicator will you use to time your decision?

Think back to 2008/9 when the Credit Crunch was in full swing. If we take the FTSE 100 index as a barometer, the lowest point was 6th March 2009 when the index was at 3530.

As I type it is currently at 5,672 which equates a 37.8% return over that time period.

And what good news have we had in that period? Nothing at all, all doom and gloom according to news reports.

So, if you are waiting for good news you will find you are probably too late.

I appreciate that short term expenses may prevent you from saving what you wish; fuel prices are at record levels, food costs are increasing and children are expensive luxuries but if you can live to a budget you can probably find enough to make a start.

And if you find you always run out of money at the end of the month so don’t have enough to save, why not turn it on its head and save first then spend?

It is no coincidence that our clients who are living a very comfortable retirement are typically those who had a saving mentality rather than a spending one.

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