Financial Fitness Part 2 - Turning monthly savings into Longterm Wealth

Step #1 - Overview

In Part 1 of our Financial Fitness guide, you learned how to track your spending, build a budget, and create a vital 3-month "Safety Net." Once that foundation is in place, you’re ready for the exciting next step: making your money grow.

This guide provides simple, clear, and actionable steps to turn your monthly savings into long-term wealth. The focus is on a simple, proven approach that you can set up and let work for you over time, giving you more freedom to focus on the fun things in life.

A great model to aim for is to divide your income like this:

• 60% on Basic Living: Housing, food, bills, health, etc.

• 20% on Fun Money: Holidays, hobbies, experiences, etc.

• 20% on Investing & Saving: This is the portion we will focus on.

An Incentive for Our Tenants

As an incentive for all tenants that do so, in a test to see if we can help set people on the right path, each tenant that demonstrates saving a consistent monthly amount for a year’s tenancy (or 12 months from April 2024 initially) I will Pay £50. To Max of £100 per property. Read on.

Step #2 - The 'Why' - The Magic of Compound Growth

The secret to building wealth over time is "compounding." This is the magic where the return you earn one year is added to your original pot, and the next year you earn returns on that new, bigger amount.

• The Power of Time: At a 7% annual return, your money will double roughly every ten years.This shows that the main ingredients for success are simply choosing a sensible investment and giving it time.

• Start Now: The earlier you start, the more decades your money has for this doubling effect to work its magic. Even a small amount like £50 a month, over a long enough period, can grow into life-changing wealth.

  
  

Focus on What Matters: It's better to focus on improving your main income and consistently investing more money rather than chasing an extra 1% return. A day of extra work is often more repeatable and valuable than spending that day trying to find a high-risk share deal.

Wealth Creation

A good way to look at saving it to view it as how you utilise your money to benefit the future you. True there are alot of pressures right now on most people due to rising costs. Just start small and keep growing. The below diagram is a really good guide on scalable ratios of life to savings.

This post is advising you how to maximise your returns from savings pot with minimum effort and risk.

If you have minimum ties and want to be agressive for financial independance, then target 40%+ of savings. To give a reality shot, when i was first investing into property I was saving and investing circa 70%+ of my income, and did so for best part of a decade. Thats pretty common with friends in property.

Lets set something straight on shares and, in the sub 20-30 year horizon, saving isnt going to make you wealthy. The immediate focus should always be increase your skills and utility which result in higher income. Then look at how you minimise living costs to save more.

Compound interest calculations 

A good YouTube channel to watch  Damian talks money – 2024 investment

Step #3 - The 'How' - Your 4-Step Investment Action Plan

Disclaimer: The following is a guide to a common and effective investment strategy, not authorised financial advice. We recommend using it as a starting point for your own research.

Here are the simple, practical steps to automate your wealth creation.

1. Open a Stocks & Shares ISA. An ISA (Individual Savings Account) allows your investments to grow tax-free. We recommend platforms like AJ Bell or Hargreaves and Lansdown, as they have good information and are well-established.

2. Make an Initial Deposit. If you can, pay in an initial lump sum. A good start would be £300, as this allows you to put £100 into three different funds to begin with.

3. Set Up Monthly Payments. Automate a monthly payment into the account from the day you get paid.Aim for at least £50, with a long-term goal of investing 20% of your income.

   
   

Choose Your Investments & You're Done. Select 2 or 3 of the recommended low-cost index funds below. Once set up, you can leave it to grow, topping it up when you get a pay rise or have spare cash.

Step #4 - The 'What' - Simple Investment Choices

You don't need to be an expert stock picker. The simplest and most effective strategy for most people is to invest in low-cost index funds. An index fund spreads your money across hundreds or thousands of the world’s biggest companies, giving you broad market exposure and diversifying your risk.

Here are some examples of excellent, low-cost funds that cover global companies.

• Primary Recommendation: Vanguard FTSE Developed World UCITS. This is a fantastic core investment that tracks big corporations across the globe and pays a dividend. 0.12% charge, 1.7% dividend, Big Corps.

• Fidelity Index World Class P Accumulation: A similar fund to the Vanguard one, tracking major economies and heavily weighted to the USA. 0.12% annual charge.

• iShares Emerging Markets Equity Index: Covers developing economies like China, India, and Brazil. 0.19% charge.

• Legal & General International Index Trust: Invests in global companies, excluding the UK.  0.13% charge.

• Legal & General European Index Class C Accumulation – 0.12% charge

Step #5 The 'Where' - Why an ISA Instead of a Pension?

For your personal savings, a Stocks and Shares ISA has a key advantage: flexibility. You can access your money whenever you choose, for whatever reason, and it's tax-free. If you are utilising all of your ISA allowance. Firstly congratulation. Secondly just then open a standard stocks account.

A pension, on the other hand, is restricted by government rules. Currently, you cannot access it until you are 55 (without paying eye watering 50% tax), and even then, it has various withdrawal restrictions. Personally, I like to control what and when I do anything with my money. So this doesn’t interest me.

Crucial Exception: If your employer offers to match your pension contributions, you should always take it.This is essentially free money and will double your investment instantly. Damian Talks Money has some sobering videos on typical company pension returns, and how you can influence this. Dial in to them.

If you have children, then the number one recommendation is open an Junior SIPP. Pay into this to allow compounding to set your children up for the future.

Step #6 - The 'When' - Setting Your Financial Goals

I’ve come to learn that for many goals can be hard to define. So here are three simple steps.

1.      Freedom - Target one years salary. – This give you what I call F**k You money and flexibility. Can always spin that into two years when living carefully. Support any decisions or events life throws.

2.      Then target £60K Fund. Then target investing into tangible assets you own via leverage – property or a business. The truth is there are few decent returns with cash less than amount, this so target getting here as soon as possible.

3.      £500K and beyond. This may sound massive, yet provided you keep paying in monthly savings, you will be surprised over a 35+ year period with compound interest. Financial leveraging via property or commerical business is the turbo charge to this level and beyound. That is a whole different post.

Step #7 - Summary

This Post has given you clear background of how you can grow major wealth over a 30 year horizon through regular saving into a UK ISA fund and selecting a low cost index tracker fund that tracks the stock market.

As an incentive to our tenants to start regular savings we are running a test to see if we can help set people on the right path, each tenant that demonstrates saving a consistent monthly amount for a year’s tenancy (or 12 months from April 2024 initially) we will Pay £50. To Max of £100 per property.

Let us know if this doesnt make sense or want some things clarifying.

If youve got this far, be nice call your mum, i'm sure she will appreciate it ;p

Check our financial blog post on wider information. The series of 5 "Feel Good" kit posts can be found here