Money really does matter! Whilst it cannot buy you happiness, the lack of it really can lead to misery and hardship.
I am always amazed by the number of people that either say ‘er, what’s that’ or ‘I have no idea what you are talking about’. Ideally everyone should be able to answer each of those questions with a ‘yes’ and at least a basic understanding.
One of the reasons that I hear for people not having any knowledge of their finances is that it is boring. And it is certainly true that each and every one of us has different priorities in life and how to spend our money, but with just a little knowledge and forward planning we can each have a very major impact, not only on the cash that we have now but, much more importantly, how comfortable we will be later on in life.
It was Albert Einstein that said;
“compound interest is the eighth wonder of the world… he who understands it, earns it… he who doesn’t, pays it”.
The only thing wrong with this statement is that this applies every bit as much to ‘she’ as to ‘he’. What this actually means is that if you get interest on your interest or dividends on your dividends then this is worth so much more. And to put this in to context, Scottish Widows (an investment company) has calculated different outcomes for £100 invested in 1950 and what it was worth in 2016. If this £100 was put in a UK building society and left untouched it would have been worth only £5,519 (inflation would have taken the £100 to be £3,134) but if it was put in equities this would have been worth £10,749 if you had taken the dividends. But the real shock for most people is that if you had not taken any dividends during that time the value would be a massive £184,494. That is, the compounding has made growth 17x more!
Now do you start to find this topic more interesting?
So in simple terms it is extremely important that everyone has at least a basic understanding of the importance of personal savings, and that everyone actually starts to save as soon as possible, as the powers of compounding can make all the difference to your comfort in future years.
But it is important that any savings portfolio is spread and the risk is diversified in order to reduce any risks.
We will explore many of the questions that I asked at the beginning of this article in the coming weeks so make sure that you look out for my future articles here.
* * *
Nothing in the above article is intended as a recommendation but simply the author's opinion on what readers should be thinking about.
in British English