History shows that stock investing is one of the best ways to build wealth. It’s why I try to set aside as much cash as I can at the end of each month to buy UK shares.
Past performance is no guarantee of future returns, of course. But research shows that FTSE 100 shares, for instance, have delivered an average annual return of 8% over the long term. I find this sort of number hard to ignore.
Threee rules for sound investing
There’s no straight answer as to how much someone should invest in British stocks. It depends on how much money each of us make, our outgoings, our attitude to risk, and our desired returns.
That said, there are certain key rules that investors can use when devising a budget. Tim Bennett, head of education at Killik & Co, has outlined several priorities that each of us need to consider when buying UK shares.
1) Clear expensive debt
Bennett states that paying off expensive loans and financial liabilities should be the first port of call for individuals. He adds that “this is much more of a priority now than it was a few years ago when interest rates were very low”.
Bennett alludes to the ‘Rule of 72’, which illustrates the huge cost of holding debt on high interest rates. He notes that “if you are paying interest of 10% compound, and not paying it off as you go along, after just 7 years the amount you owe may have doubled (72/10)”.
2) Prepare a ‘rainy day’ fund
Describing the wisdom of setting aside money for unexpected costs, Bennett notes that “there is no point in committing money to equities if you may have to suddenly draw on it in the short term”.
He suggests that setting aside the equivalent of three to six months of one’s gross monthly spending could be a good idea for single people or couples, or up to a year’s worth of spending for those with families.
Bennett says that individuals also need to consider expenses that stretch just beyond the immediate future, and to invest capital accordingly. He suggests that assets like bonds can “work well” in this situation.
3) Invest in lifetime savings
With these steps addressed, Bennett says that individuals should next create a money pot for long-term share investing. He explains that “the exact selection will depend on many factors and, in some cases, the right mix might include funds too”.
Bennett says that a good cash flow model can be helpful at this stage. It can tell individuals when they’ve hit peak savings, at which point they are decumulating wealth rather than building it. He also notes that investing in a tax-efficient product like an ISA or SIPP is another good idea.
Here’s what I plan to do
Following these steps can be a good idea at the best of times. But in tough periods like this they can be essential in helping individuals keep their heads above water.
I personally plan follow those steps. I also intend to keep using any spare cash I have to buy UK shares. As Bennett says: “over the long-term, shares have demonstrated their ability to beat inflation”. Investing at every opportunity moves me that bit closer to my long-term goal of retiring in comfort.
