Updated: Jan 31
First, lets answer an important question - Why is investing important to you?
When I pose this question to my friends and family they typically say the following - reap what you sow, to provide a nest egg for the future, to avoid wasting it or achieve an important life goal. For you it may be something different and that's the point. What is your why for investing your hard earned money?
Simon Sinek is one of my favourite leadership coaches. He is best known for his philosophy on the power of why. He claims until you understand your why you won't change your behaviour to get the results you need and want. Lets look at a real example of David who knows he can improve his financial situation. He's tried to save in the past but keeps dipping into his savings.
David lives in Kildare. He is 25 years old, single and lives with his Mum. He doesn't save regularly. He has no clear goals defined for the next 5-10 years. He works as a machine engineer in a local factory. He earns €450 euro a week after tax. After all his expenses (cigarettes, takeaways, rent and car loan) he is typically left with €80 a week to save or invest.
During an initial conversation with David via webchat I asked him to imagine he's aged 35 (average age for first time buyers) and looking back to today. What behaviours do you need to change today that will have the most positive impact on your financial situation? Stop smoking and save more he said. Why is it important for you to save more, I asked? I want to be the first in my family to own a house and I'd like to get my teeth fixed as it's effecting my confidence. Two very honest answers. Maybe webchat made it easier to share these deeper reasons why.
Now David has a north star. He can confidently start saving money on a regular basis with a strong purpose driving him forward and making it more likely to stick to his goal.
So now the next questions is were is the best home for David's money over the next 3-5 years. In an ideal world David could receive high growth (5-10% per annual) on his money, access it when he wants without penalty and it would be 100% secure.
Unfortunately, we don't live in an ideal world. We live in a world of trade offs. If you want high growth you trade off security. If you want high security you trade off growth. If you want access you risk dipping into your savings.
So what is the solution to this problem?
A combination of deposits and investments. Deposits give David security and access to his money and will be best used for his dental costs in the next 12 months. Investments will offer higher growth potential and since David needs time to build up a deposit significant enough to buy a home he is best investing this portion of his money.
So David has €80 each week (the equivalent of a packet of cigarettes a day)this equates to €350 each month.
I recommend he saves €150 each month x 12 months giving him €1800 to cover the cost of his dental treatment. I then recommend saving the balance €200 each month into a longer term investment fund that will yield 5% a year for the next 10 years. This will yield approx. €32000 compounding annually.
Eienstein once say “Compound interest is the eighth wonder of the world,” Einstein reportedly said. “He who understands it, earns it. He who doesn't, pays it.” David now understands compound interest and the power it has on achieving his life goal.
Effort v Impact - I believe this plan is low effort for David and has a high impact on his life goal. What behaviours need to change for David? The biggest change is setting up 2 weekly standing orders to automatically take out €80 from David's current account. The best way is to simply set up two standing order to come out on payday each week. The maxim of "pay yourself first before you pay anyone else" is key here. These transactions can be set up online or in his local branch.
David is now regularly saving 17% of his total income with very little cut back on his current lifestyle. He is benefiting from compound interest and the power of a strong why. David is now in control of his financial future with a big goal that is achievable and sustainable with a very small behavioural change.
Imagine if David got a promotion, stopped smoking or cut back on takeaways, what else could he achieve financially?
I believe he can achieve anything he sets his mind too. As can you. All you need to do is start with your why.
Think big, start small.
* This is not financial advice but my own views based on my experience in the industry. If you want advice I recommend you talk to a qualified advisor.