Set and forget investing

Set and forget

Set and forget with index investing

After many years of investment mistakes, I finally realised that set and forget is the strategy that suits me.

Spend less than you earn and invest the rest. This requires some serious discipline and budgeting skills.

Budgeting allows you to do some financial planning. You might have a loan that is preventing you from investing into an ISA or SIPP.

Let us imagine you have 2 cars. ‘What if you could manage with 1 car and bike to work, instead?’ By selling the car you don’t need, you could pay off the loan.

Now you have no loan repayments, and you are saving on fuel, insurance and car tax. This could mean you are able to put £300 pcm into an ISA or SIPP.

There are no guarantees in stocks and shares. I have read over 100 books in 2 years and many books on index investing. I am convinced that you can earn 7% interest per year with index investing. If you are still on the fence, I totally get it. I just want to raise your awareness. There are more options than settling for less than 1% in a high street bank.

The following example will use a low-cost index fund and I will call it retire at 57. Let’s assume that John (our imaginary investor) manages to average 7% interest per year over the next 27 years. Remember, there are no guarantees in the stock market.

Let’s say that John is a 30-year-old who has an effective budget. He has decided to manage with 1 car and now has £300pcm to invest. He is going to invest in the retire at 57 low-cost index fund and will invest for 27 years.

Now, because of John’s tight ass budget, he has been able to invest in a pension fund when previously he had no pension. With a little financial literacy, he was also capable of choosing his low-cost index fund (John is like me and favour’s Vanguard due to their low costs and their proven track record).

So, here’s what a little hard work can do for you … At 57, John has a SIPP that has a value of £268,141. He was on a path towards no pension that would have affected him and his family in his late 50s.

(Note – to work out what you can earn you can google compound interest and add your projected figures. Or you can get a compound interest app for your smartphone)

Now all of a sudden, he is happy in his late 50s because of some intelligent investing decisions he made as a 30-year-old.

To do this, John had to develop his money mindset along the way. He had to become comfortable with delayed gratification. 

More ways to save

When you start looking into your bank statement and start to focus on your expenses, it’s likely you will find out many ways to save each month.

Your TV subscriptions is a good place to start. My sky bill had crept up to £140 pcm without me realising it. With my blasé attitude to personal finance, I assumed it was about £100 pcm.

What was even worse was my BT subscription. The BT I barely even watched. After having BT for about 3 years, I had probably watched 5 Premier League games and 3 UFC fight nights.

The BT was only £10 pcm or at least I thought it was. When I actually looked through my bank statements, the real cost was £30 pcm.

I decided to remove BT Sport. I also removed the sport from my Sky and looked at what else Sky could offer me. The Sky bill was reduced to £84 pcm so with my new Sky bill and with BT removed, I had made a total saving of £86 pcm.

There are other ways of reducing your expenses like looking at old gym memberships you are still paying despite not having went for the last few years. Or you could reduce the takeaways each month or how many times a month you go out for food.

For some extra help with your budgeting, read the excellent book RESET: https://duffmoney.com/2020/11/05/reset-your-personal-finances/

Let’s look at John if he made budget adjustments similar to mine. He now bikes to work so he is healthier and £300 pcm better off. Not only that, but he has also shaved off £86 pcm from his TV subscriptions and another £114 by eating out less and reducing the takeaways he and his family have each month.

With his healthier lifestyle, he also has the added bonus of £500 pcm to invest in his new retire at 57 low-cost index fund.

Here’s a summary of how he is going to invest:

  • As a 30-year-old, he is going to invest for 27 years (as this is his retirement target)
  • He will invest every month and is now able to invest £500 pcm in his fund
  • The fund he chooses is a low-cost index fund and because he is now financially literate, he is confident of achieving 7% interest per year
  • With his new wealth mindset, he is comfortable with delayed gratification and is happy with his retirement plans

With the new £500 pcm investment, he is going to massively increase his pension pot. The pot has now increased to £446,902.

If we look at the contributions, John has invested £162,000 in 27 years. The £284,902 profit is because of the 7% interest that has accumulated over time. This reiterates the effect of compound interest.

From gaining his wealth mindset, John went on to get some much-needed financial literacy. With his goals, he was clear about when he wanted to retire, and this motivated him to get his budget in place at the age of 30.

This £446,902 might not enable him to retire with his current lifestyle but it is better than no pension pot at all. It gives him options.

He could buy 10 rental properties at £100,000 each. With today’s conditions, he would need £250,000 (£25,000 deposit x10). This leaves £196,902 as a backup or holiday fund and gives him security.

With his property knowledge he has acquired over the years, he is confident he can make £200 pcm off each property after all expenses. This is his new pension of £24,000 per year for the rest of his life.

You might think differently and want to use the £446,902 in a way that suits you. I am just using this as an example and illustrating the benefits of having a budget in place as early as possible.

Book of the week

Most of my blogs recently have been about mindset. It is January and many people normally struggle in this depressing month of Mondays. COVID just brings more misery! A book I am going to recommend might help you out and lift your spirits. BE WATER, MY FRIEND – is beautifully written by Shannon Lee. It covers some of Bruce Lee’s teaching’s and is all about mindset, being like water and being able to adapt to whatever life throws your way.

For a hard copy visit my sister’s excellent bookshop online: https://imaginedthings.co.uk/

Picture: https://thecollegeinvestor.com/17810/investing-in-your-30s/

 

 

 

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