Loads of people have mid-term savings goals like getting married, buying a house and funding kids’ educations, and it’s certainly a good idea to save towards these sorts of things. However, if you’re looking to grow your money, having a pot put aside that you won’t need to access for the longer term can lead to bigger and better returns.
We live in a world of instant gratification. When you place an order online, for example, you expect it to be delivered the next day (or in some cases the same day!) There’s no such instant gratification with savings and investment, though. It’s a longer game where, generally speaking, the longer you’re able to put your money away for, the more chance it will have to grow.
Compound interest - the eighth wonder of the universe
It’s claimed by some that Albert Einstein once said that compound interest is ‘man’s greatest invention’. We’re not convinced that he did, but what is clear is that compound interest is certainly a compelling reason to look at your savings or investments as a longer journey.
Compound interest, put simply, is when you earn interest on interest. For example, if you had £1000 in a savings account paying 5% interest, you’d have £1050. If you then kept all that money saved, you’d earn £52.50 in interest the next year, £55.12 the next year, and so on. At the end of 10 years you’d have £1628.89, which proves that, sometimes, time really is money!
Compound interest only works if you keep the money you make each year back in savings, and keep your original money there too. This requires patience and discipline, because it can be tempting to splash the cash when you start to see returns.
Investing for the long term - staying calm when things get rough
The same can apply to investments. In the worlds of stocks, shares and funds there’s no such thing as a get-rich-quick scheme (unfortunately!) and it’s important to stay realistic and calm when you first start investing.
When you invest your money in things like stocks and shares, it’s often impossible to avoid market ups and downs, and it’s likely that any money you invest will go up as well as down. However, if you stay focussed on the bigger picture and keep calm, it can be possible to see returns.
Although there is nothing you can do to prevent the market from fluctuating, there are some steps you can take to try and prevent dramatic losses from market changes, and to create a portfolio that’s set up for longer term growth. Making sure you have a diverse portfolio can help to protect you from dips in one area. This means spreading your investment across different industries, countries and types of asset.
If you’re focussed on short term gains in the next year or two, it’s unlikely that you’ll see a significant return on your investment, if you do see any at all. Play the long game, however, and you could see some promising returns.