How to turn monthly savings into Longterm Wealth

Step #1 - Overview

I’m writing this in the post haze of the news smokescreen that is the Spring budget in the UK. The aim is to provide clear direct actionable points for tenants to set up a saving regime that works and you dont have to over think. I'm big fan of keeping things simple, 80/20 rule approach. Focus on get the important levers moved and avoid wasting time on maginal gains, for most things. Unless it is an area you specialise in. Follow the simple steps in this post and you can set yourself up correctly to build long term wealth, giving more time for fun, and you will learn to pay zero attention to the magical slight of hand trickery of future budgets. Always focus on whats in your sphere of control.

As a continuation of the “Feel Good” kit this is a new blog post on fool proof steps to follow for monthly savings that will over a 25 year plus timeframe turn into major wealth. We also strongly recommend the other guides in the kit.

As an incentive for all tenants that do so, in a test to see if we can help set people on the right path, each tenant that demonstrates saving a consistent monthly amount for a year’s tenancy (or 12 months from April 2024 initially) I will Pay £50. To Max of £100 per property. Read on.

Step #2 - Wealth Creation

A good way to look at saving it to view it as how you utilise your money to benefit the future you. True there are alot of pressures right now on most people due to rising costs. Just start small and keep growing. The below diagram is a really good guide on scalable ratios of life to savings.

This post is advising you how to maximise your returns from savings pot with minimum effort and risk.

If you have minimum ties and want to be agressive for financial independance, then target 40%+ of savings. To give a reality shot, when i was first investing into property I was saving and investing circa 70%+ of my income, and did so for best part of a decade. Thats pretty common with friends in property.

Lets set something straight on shares and, in the sub 20-30 year horizon, saving isnt going to make you wealthy. The immediate focus should always be increase your skills and utility which result in higher income. Then look at how you minimise living costs to save more.

Step #3 - Compound Interest

Compounding is the magic where what you earn one year is added to your pot, so the next year you get growth on the growth, plus what you add in.

At 7% returns your money will double every ten years.

To long-term plan to grow wealth through compounding income and capital growth. It is actually very simple to do this. The main ingredient is simply selection and time. Compounding growth will take care of the rest. Yes its great if you can throw a significant sum a month at the problem. However, even £50 over a long enough timeframe will create life changing wealth. As always the earlier you start the better, more decades to double concept. If you haven’t already started or are doing it wrong, then the best time is now.

It is common for people to get caught up looking for an extra % return or to gamble on crazy ponzi schemes offering 30% returns. When the reality is if you have a good sellable skill, it is always far better to double down on that and push more money into simple low risk investments. Spend a day geeking on individual shares for chance to get 12% return on a £1000 (£120 - capital gains tax at time), or go and work an extra day shift. The day shift is infinitely more repeatable than the ability to find such an amazing share deal. Unless you have very clear inside information.

The values of main stock indexes, like S&P500 have returned approximitely 10% average returns

Compound interest calculations

A good YouTube channel to watch  Damian talks money – 2024 investment

Step #4 - Investment Steps

1. Open an ISA account with AJ Bell or Hargreave and Lansdown. (there are other options. Pros and cons on each ive used these for years and they have good info, often discount mgmt. fee for index funds)

2. Pay in an initial lump sum (£300 would be good as it allows £100 per index fund)

3. Setup a monthly payment into the account, recommend at least £50. Target to save 20% of income every month.

4. Top up spare cash or payrise money as you get either

5. Select 2 or 3 of the recommended index funds

6. Done.

Step #5 Recommended Index funds

Here are a selection of decent funds with low ongoing costs and which will spread risk and returns across global companies. The Vanguard FTSE Developed World fund is my primary recommendation, as it also gives a dividend.

1.      Vanguard FTSE Developed World UCITS  - 0.12% charge, 1.7% dividend, Big Corps.

2.      Fidelity Index World Class P Accumulation – 0.12% annual charge. Big corps from major economies, USA weighted. Similar to 1

3.      iShares Emerging Markets Equity Index – 0.19% charge – Covering China, India, Taiwan, Brazil etc

4.      iShares Japan Equity Index – 0.08% charge, Japanese industries

5.      Legal & General International Index Trust – 0.13% charge, Global except UK.

6.      Legal & General European Index Class C Accumulation – 0.12% charge

Step #6 - Financial Goals

I’ve come to learn that for many goals can be hard to define. So here are three simple steps.

1.      Target one years salary. – This give you what I call F**k You money and flexibility. Can always spin that into two years when living carefully. Support any decisions or events life throws.

2.      Then target £60K Fund. Then target investing into tangible assets you own via leverage – property or a business. The truth is there are few decent returns with cash less than amount, this so target getting here as soon as possible.

3.      £500K and beyond. This may sound massive, yet provided you keep paying in monthly savings, you will be surprised over a 35+ year period with compound interest. Financial leveraging via property or commerical business is the turbo charge to this level and beyound. That is a whole different post.

Step #7 - Why and ISA and not a Pension

ISA is tax free, easy to open and you can access the money whenever you chose. Winner. There are other ISA options where the government also gives you money to incentivise saving. Worth a look. I’m not commenting on these are they could be out of date within a few months.

A pension is restricted to whatever rules the government choses at that time. Currently, you cant access until 55 years old (without paying eye watering 50% tax) and even then it has various withdrawal restrictions. Personally, I like to control what and when I do anything with my money. So this doesn’t interest me.

If you have to pay into a pension via work and they match the income then take this up, as essentially doubling your money in single role of the dice. Otherwise then do the minimum and maintain control with money outside… Damian Talks Money has some sobering videos on typical company pension returns, and how you can influence this. Dial in to them.

If you have children, then the number one recommendation is open an Junior SIPP. Pay into this to allow compounding to set your children up for the future.

If youve got this far, be nice call your mum, i'm sure she will appreciate it ;p

Summary

This Post has given you clear background of how you can grow major wealth over a 30 year horizon through regular saving into a UK ISA fund and selecting a low cost index tracker fund that tracks the stock market.

As an incentive to our tenants to start regular savings we are running a test to see if we can help set people on the right path, each tenant that demonstrates saving a consistent monthly amount for a year’s tenancy (or 12 months from April 2024 initially) we will Pay £50. To Max of £100 per property.

Let us know if this doesnt make sense or want some things clarifying.

Check our financial blog post on wider information. The series of 5 "Feel Good" kit posts can be found here