Saving for the future using a savings account, is a safe but inefficient way of accumulating wealth at the best of times, but with low interest rates, your money is doing very little for you.
There is a better way. Make your money work harder through investing. It does not matter how little you have - a few £ or $ invested on a regular basis will do. What matters is time, and when you are young, you have lots of it.
Like some of you, I started out with absolutely nothing and I've lived through economic hardship. I started investing in the late 90's, made rookie mistakes, seen booms and busts but I've also made money and today I'm significantly better off, financially, due to the actions I've taken.
Yes, there are risks with investing especially if you have short term needs. If you plan to save for a year or more - then consider investing. History shows that medium to long term investing will deliver more gains than your savings account.
To illustrate why investing makes sense, take a look at these charts, the S&P and Nasdaq (US markets) and the FTSE 100 (UK market), from the year 2000 to 2020.
3 do's and don'ts to remember at all times
Before you are ready to invest, consider these three do's and don'ts.
- Do invest in your 1. health (mind and body), 2. relationships 3. wealth (in that order).
- Do invest to suit your age and objectives. Young? invest in equities (shares) and real-estate to create wealth. Much older (or rich)? invest in bonds, gold, art to preserve wealth.
- Do invest with a logical mind. Understand what you are buying and why you are buying it and when you want to sell it.
- Don't let anyone else manage your finances. Only you should control your future.
- Don't invest if you have debts. The interest on debt, like loans or credit cards, is guarenteed while any money made through investing is not.
- Don't let emotion control your actions. Don't be too quick to act (buy or sell) or you may be regretting it for a long time.
Investing in equities, that is, shares sold on the stock market, can be accomplished through several methods. Each option depends on your circumstances and comfort.
Exchange Traded Funds (ETF)
A word about Tax - yes you need to read this bit..
- Dividends you receive will be taxed as income at your income tax level.
- Profits you make from the sale of assets (ETFs, Index trackers or individual shares) incur capital gains tax (CGT). (Losses result in a CGT reduction).
In the US, capital gains tax is charged at different rates depending on how long you hold equity before you sell it and your income level. Selling any asset, held for less than a year, incurs short term capital gains tax and is taxed based on your income level (rates range from 10% to 37%).
Your taxable income is £20,000.You made £12,600 in profits from your sale of assets.Your CGT allowance is £12,300.To calculate the tax owed:Deduct the CGT allowance from your profits. £12,600 - £12,300.
That leaves £300 to pay tax on in our example.To get the tax rate, add the £300 to your taxable income (£20,000 + £300).
Because £20,300 is less than £37,500 (basic rate tax band), you pay CGT at 10% of the £300.This means you’ll pay £30 in Capital Gains Tax.
£30 tax on £12,600 is pretty cool eh?
So why is investing attractive right now?
- the car industry. For the first time in 100 years the electric car is now considered the future for personal transportation.
- the energy industry with a shift to clean energy sources (solar, wind, hydrogen etc).