When the topic of “Managing Your Finances” was first proposed as one of Congress London’s monthly talks, I was filled with horror. I hate managing my finances and talking about money. Interestingly, it seems that my dislike for this topic is not uncommon; especially among women. Most women seem to pass their money onto their husbands, partners or fathers to manage for them. Which is exactly what I have done.
But why are we doing this? Research shows that women are wiser when it comes to investing. They research more before making decisions and admit when they have made an investment mistake. They make less impulsive decisions and plan more long term.
Perhaps due to women’s less risky appetite, the other tactic women seem to use when saving their money is to save cash. But while watching our savings account steadily increase each pay check might feel like you are being financially responsible, we are losing out over the long term. We must accept that just keeping money in the bank is not doing us any favours and here is why...
Cash is NOT king.
Very low interest rates have depressed the return on cash which means cash savings are now eroded by inflation over time. So, saving your cash means losing your money. This was a shocking revelation to me personally.
We obviously shouldn’t rely on men to manage our finances but if we can’t just rely on cash increasing in our bank accounts what should we do? We have all seen first-hand the horror stories of people losing all their money in 2008. Markets go up and down and there is a chance you can lose a huge percentage of those hard-earned savings.
So how can we get over the fear of investing and start on this journey towards financial security and independence. Kitty Bhaman and Graeme Taylor with UBS gave us the following tips and advice
Small smart steps + time + consistence = radical difference of savings
First, know your current financial situation and invest regularly. How much money do you need in the short term to live on and how much can you save? Whatever you determine you can save, do so by continually investing not leaving it in a savings account. By continually investing you will be buying when the markets are up and down which in the end evens everything out. In other words, if the markets crash and you keep investing you are getting a good deal with what you are buying now despite losing a bit with the crash.
When the economy dips and you lose money, your gut tells you to run and save what you can. But this is when you need to trust reason over emotions. Markets are volatile; they don’t continually rise as much as we all wish they would. But the good news is, in the long run, as the global economy continues to rise so does global wealth. There may be dips but overall the world economy has grown in 55 of the last 56 years. Think of just the last two decades, we have experienced the Russian / Asian Crisis in 1998, the Dot.com bubble in 2001 and the Great Financial Crises of 2008.
Kitty showed how leaving the market over the last 20 years for even just a few days would have dramatically decreased your savings:
● If you had stayed fully invested across those 7,200 days your investment increased by 7.4% despite the troubles.
● If you missed 10 of the best days in those two decades your investment would only have increased by 4.2%.
● If you missed 50 of the best days your investment would have lost about 3%.
As you can never know which are the best days, stay invested!
No one can be 100% sure of what will happen. There will always be risk with investing money so the best way to mitigate this risk is to have a diverse portfolio. A diverse portfolio may include cash, equities, hedge funds, real estate and commodities.
One asset class will always outperform another in any one year and one asset class is rarely the best performer consistently over many years.
Ask yourself what are you trying to save for and how long do you want to invest. Are you trying to save for a house, children, retirement? Figure out your end goal and that can also help you when organizing your portfolio.
Start Now: Compound Interest
While compound interest is your worst enemy when it comes to paying off loans or debts, it is an incredible ally when getting your money to make money. Compound interest means that the interest you earn from your investment is added to your savings which results in your balance not just growing but growing at an increasing rate.
For example, if you invest £100 pounds at 5% interest at the end of year one you will have £105 pounds earning £5 that year. The next year you will earn more than £5 you will earn £5.25 because you now get 5% of £105.
This means the sooner you can start saving the more money your money will make.
If you annually invest £5000 from age 35 at 5% growth, at age 65 you will have £353,803.
But if you annually invest £5000 from age 25 at 5% growth by the time you are 65 you will have £639,199. Compound interest has earned 25 year old you £235,396 more!
Also make sure to take advantage of allowances including ISAs, pensions schemes and dividend allowances so you don’t pay away your growth in taxes.
Remember companies that are well managed are likely to be able to increase their profits in the long term. So why not get a piece of the action? By demystifying investing money, one can secure financial independence which enables female independence and confidence.