Investing — Get Rich Slow

The great enemy, inflation

Coffee prices rising in price

Why do you need to invest?

Why do you need to invest? Why can’t you just keep your money in a bank account? There are two answers:

  • Inflation
  • Growing your money

Inflation is the decline of purchasing power of your money over time. The target rate of inflation from the bank of England is 2% so each year your money will be able to buy 2% less of goods and services than the previous year. See the image below to understand how it affects the price of goods. As the current interest rate on bank accounts in the UK sits near 0% and looking to stay that way, it’s important to take note of the effect that inflation has on your money.

As you see your spending power goes down over time. £0.25 pence could buy you a coffee in 1970 whereas now that coffee would cost £1.59. So you don’t just want your money to sit there lowering in value year on year. So how do you protect your money from being eroded by inflation? You need to use your money to buy assets. An Assert is something that increases in value over time, such as stocks, paintings, gold, houses, and so on. Not only does this protect your money from inflation but it also increases in value above inflation.

Growing your money. You want more than you put in so that your money makes money. But how does that actually work? Well, this depends on what you buy with your money there are different types of asset classes. An asset is something that gains in value over time. This can be a rental property, a piece of gold, or stock. Each asset class has different properties that yield different results. Stocks are an example of assets that grow over time and one of their properties is that they can yield a dividend which is a share of the profit that the company has made depending on how many shares you have. Overtime when you have acquired enough stocks this dividend could become a passive income that you could potentially live off. So as you can see making your money work for you is the best way to achieve financial and potentially financial freedom where you do not need to trade your time for money.

Assets! What are your options? There are many types of assets that broadly fall into categories. There are non-income-producing assets such as Gold or other precious metals. Cryptocurrencies mainly fall into this category as for the most part you only make money on cryptocurrencies is when you sell them. On the other hand their income-producing assets such as stocks, bonds, and rental property. These assets provide the money even you don’t sell them such as dividend payout from company profits, bonds interest, and rent paid by the tenants. In general, the best investment you can make in the long term is buying stocks, because the stock can use the profit to grow and expand the business to generate more money. Whereas Gold and other assets cannot do this as they do not produce anything. The average rate of return S&P 500 is 10% (Not taking inflation into account) So you with an inflation of 2% you net a profit of 8% return on your investment. Cryptocurrencies and other non-producing assets can make you a lot of money but only when you sell them. So the true long-term value with stocks is dividend-paying stocks that you hold forever that provide an income. Property can also be a long very good long-term asset that you can hold until judgment day provided that you aren’t leveraged too much and it’s in a good location.

Compound Interest is how money makes money. If stocks generate 10% returns annually over a long period of time such as 25 years if you invested £10,000 you would have a total of £108,347.06 with a total interest gain of £98,347.06. If you look at the table below you can see how the yearly interest grows over time as the balance also grows.

Compound Interest over 25 years Table

Summary, this is the first of several blog posts about investing, the others will include the different assets and their properties. Providing you have 6 months of expenses, your money should be invested. So it can grow and make you more money.

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Richard Price-Jones

Richard Price-Jones

Software Engineer, Interested Finance and Tech