Investing is a way to nurture your savings, to give them the best opportunity to go further. It is how something small, like one pound, can grow to become something significant.
Imagine if on the 1st January this year you decided to save one pound a day, every day, for the next 30 years.
This remarkable potential is just waiting there, locked inside every pound you are able to save and is something that we believe everyone can, and should, harness.
So how does it work?
The economists call it Compounding: consider it a potential exponential multiplying force for every pound you save. Whilst there can never be any guarantees, think of it as the ability to earn interest on your interest, or when it comes to investing – returns on your returns.
In most of our daily lives compounding does not always work in your favour. Let’s think about your credit card for a moment. Here you are charged interest on anything you spend, and then if you don’t pay it off all at once, you are charged interest on the interest already applied. That’s how that £100 shopping spree can become hundreds of pounds of accumulated debt. If however this interest were applied to your savings, you can begin to see the power of investing is a result of compounding working in your favour. Becoming a virtuous circle of returns, rather than of interest owed. Over the course of a year the effects of compounding might only be slight, but over thirty years, the difference becomes vast.
The simple fact is that the longer you are able to invest for, the longer your savings will have to grow. It is for that reason that investing £1 a day is far more effective than saving £365 over the course of the year and then investing it all in one go, because the pound you set aside on day one would have missed out on a year’s worth of interest. This may not matter much on just one pound, but that lost interest across your savings over many years, matters a great deal.
Investing over the short term can be incredibly unpredictable because the value of some investments can undulate almost daily. The solution is to be patient and take a long-term view (we don’t advise you invest for less than five years), so that all that is required from you is commitment and the tenacity to ride it out. As the Nobel Prize winning economist Paul Samuelson once said, “Investing should be like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas.”
As a business we have always believed the power of a pound well invested is something that everyone can, and should, harness.
Investing is simply about taking whatever it is that you have, and giving it the best chance to become something more; to build and grow your savings over a lifetime.
How we got to the numbers:
If you save £1 every day for 30 years you would have saved £10,950. We’ve assumed that inflation rises at 2% each year to get to £14,818.
So how could this become £31,851?
£1 saved every day. Rising with inflation each year at 2%, just as above.
But for this figure we are calculating that, each week, these savings have been put into an investment that averages a 6% annual return. We have included investment fees in this calculation: £1 per month deducted until £1,800 is saved and then 1% of the total amount invested charged each year. So the number you see is the number you could expect back. Even after the deduction of fees, the difference between saving and investing is extraordinary.
The average real return of UK equities over the last 116 years has been 5%, according to the Barclays Equity Gilt Study, which is generally seen as an authoritative source on the matter. We never want to over-promise as investing is not a panacea, so we have been cautious with our assumptions and assumed a return rate of 4%. We have assumed a nominal rate of return of 6% and an inflation rate of 2% (consistent with the Bank of England’s target), which means that you get a real return (i.e. real monetary value after inflation) of 4%.