Step 4 of 5 : Learn how to make your savings grow

So, you’ve worked hard to save more for your financial investment and are amazingly putting away £2k of money each month into your savings. What could possibly go wrong? I mean saving that much money you are surely guaranteed to have an easy life in the future? That dream car is just waiting around the corner… Sadly not, unless you can make your savings grow by themselves, it will be an uphill struggle.

It can be hard to carve out savings. But if you then invest those savings in the wrong place then you’ll be wasting a lot of effort. If you want to retire early then you need to make every penny or cent work for you. You need to invest your savings in the right place. Sure you can put you savings in cash account and reduce the risk of losing it. But if you do that every year you can guarantee inflation will be higher than whatever interest rate you can get on your savings account.

Know your risk appetite – but don’t play it too safe or you will never make your savings grow

Life is inherently risky. There is only one big risk you should avoid at all costs, and that is the risk of doing nothing.

Denis Waitley

Each of us will have a different appetite to risk. Some will be willing to lose some money for the chance of a 10% return, whilst others will carefully make sure there is no risk of ever losing any of our financial investment. You need to have an investment strategy that

  1. you are happy with, and
  2. will help you get to where you want.

It is a balancing act though. Take too much of risk and you could lose everything. Take no risk and you money will hardly grow at all. The good news is that since 1989 the UK stock market has risen by over 5% each year on average. Yes, there are risks attached, but if you can get an investment that tracks the stock market you are massively boosting your chances.

If you’re constantly worried about where your investments are held then you need to reconsider things. Take a step back. What is the point? The whole idea of financial independence and early retirement is to live a more fulfilling and enjoyable life. If your financial investment decisions are stressing you out, then maybe you’d be better choosing something less risky. It may take a little longer, but you can enjoy your life!

Whatever your risk appetite, there are some pointers though that are be helpful for all of us.

Cash won’t help you reach financial independence

how to make your savings grow
Charles spent at lest 3 hours a day stroking his cash pile. Unfortunately this didn’t help him retire early, but it did remove all of the creases from his $10 notes. #pristine

Cash is great. I love cash. If you handed me a wad of cash right now with no strings attached I wouldn’t turn it down. But it shouldn’t form the majority of your financial plan. Put simply, anything you have sitting in cash is almost certainly losing you money.

In the UK at the moment interest rates for most cash accounts aren’t even 1%. But inflation is running at over 2.5%. So every year, you will lose c1.5% of the value of anything left in cash deposits.

When building your retirement pot many people therefore decide to only hold in cash what is needed for short term emergencies.

Some people also hold some cash ready to invest should the market drop, but you will need to consider if you are confident you can time the market.  Hint : investment experts can’t do this and neither can you…

During the accumulation stage cash (or cash like investments) should primarily be used to provide you with an emergency fund. This can be used to tide you over if you you suddenly need to spend money on something, such as you car breaking down. There may be other instances, but the key point is that holding money in cash doesn’t just waste potential returns, it actually loses money over time.

But if cash isn’t a good idea, where should you hold you financial investment?

Invest in stocks and shares, or something you know you can grow

financial investment with cash
Kendra’s main mistake with her retirement plan was deciding to bury all of the money she saved.

There are many, many options that you can choose that will provide a better return than cash. You could invest in property and become a landlord. You could invest in your company to improve its growth and value.

For most people though, unless there are better alternatives, the stock market is the place to invest. Over a long period of time, stock market returns have consistently beaten inflation by c4%. Within that though there is a lot of volatility,

But if the stock market is the place for your financial investment, how do you do it? The answer will no doubt be different for some people, but on the whole the best approach is simply to spend time in the market. From the outside looking in the shares can seem like a gamble, companies can go bust and and you could lose all of your investments in one go. You could mitigate this of course by investing in several companies but this is both difficult and inefficient.

Thankfully there are options out there such as ETFs (exchange traded funds) which effectively track the whole stock market. This means you can invest your money and rather than gamble on individual companies, allow your investments to trend in line with the overall stock markets.

Make sure your risk is aligned with the stage of your journey to financial independence

Playing gung-ho with risk is never a good idea. There will always be a balance between risk and reward. Assuming you have put your savings into ETFs though the risk isn’t that you will lose your money, but that when you come to retire or draw down the stock market will have tanked. The key point is that for most people, when you are over (say) five years away from retirement, you should be able to ride out this risk. You can hold onto your investments and they should rebound.

There is a lot more to say on managing your risk, but the key takeaway is that when it comes to long term investments your main risk is not volatility, but inflation eating away at your capital.

Make your investments work hard for you

Increasing your savings can be hard work whether you achieve it by growing your income or reducing your spend. So once you’ve done this, you really don’t want to then waste returns by investing in inefficient ways. Given the long time scales need not just to reach financial independence, but for your portfolio to sustain you after that, even a 0.5% annual drag on returns can have a huge impact.

The good news is once you’ve got your investments working efficiently it isn’t too hard to keep that maintained. It is largely a case of just continuing to do the same thing.

Keep fees as low as possible

reduce investment fees
Oliver loves helping others so always picks investments with the highest fees. This picture was taken seconds after he agreed 2% commission with Santander. A happy day for Oliver!

A golden rule of investment is to keep fees as low as possible. The difference this has on your returns can be huge. If you want to make your savings grow, then keeping costs down will be a huge factor in that.

  • Lets say that your investment grows by 4% every year.
  • If you are paying fees of 1.5% then you will only see net growth of 2.5%.
  • However, if your fees are only 0.5% then you will see net growth of 3.5%.

Of course, if a slightly higher fee produces an even higher return then it is worth paying the premium. But if you consider many fund managers struggle to beat the market higher fees will not guarantee a better return. This is the reason many people are now using Exchange Traded Funds (ETFs) as they have low fees, and will broadly track a selected market.

Aim to be as tax efficient as possible

I don’t mind paying taxes, they help support the infrastructure around us and mean we don’t have to worry about keeping roads patched up or having a hospital on hand when we fall ill. But if you don’t plan your finances around the tax rules specific to where you live then you will be leaving money on the table. As I live in the UK any analysis of tax on this website are focused on UK tax only.

In the UK during the accumulation stage for most people this will mainly involve investing in pensions and ISAs (Individual Savings Accounts). There are also other considerations including capital gains tax, tax on dividends and corporation tax.

There is good news and bad news if you live in the UK.

  • The good news? You should be able grasp the key tax planning rules for the first two areas you are likely to use during the accumulation stage. ISAs are pretty easy to grasp, and flexible to work with too. Pensions are obviously much more complex, but for most of during the accumulation stage it is just a question of maximizing your allowance.

Don’t over complicate your financial investments

Alison’s portfolio of 523 different shares finally took it’s toll on her stress levels. Thankfully for me she had time to position herself in an artistically good pose during her moments of pain.

Life can be complicated enough so don’t add more complications.

The simpler your financial investment plans, the easier it will be for you to keep track.

For this reason, as with the lower fees point just mentioned, many in the financial independence community focus their investments in Exchange Traded Funds (ETFs). These funds “mimic” a given market by having a selection of shares representative of it. This means you don’t need to have a portfolio of various shares – just leave it to the ETF. This takes out the difficulty of picking shares. You are not trying to beat the market, but track it. The reason for this approach is that over time the performance of the market should produce a good return. Over time = 5-10 years at least.

If you do decide to invest in shares, then again simplicity is a good approach. You don’t need to have hundreds of different shares to try to get a balanced portfolio.

Don’t rush your decisions – plan well

There are many decisions to make about your financial investment, and we’ve not even scraped the surface in this article. Any retirement plans you have will be a long term decision, so there is no need to rush your choices.

Attempting to time the market, buying high and selling low – they sound tempting. But they almost impossible to achieve.

If you are struggling to make a decision though, remember the previous point. Keep things simple at first. You have plenty of time to learn more about becoming an investment ninja, but you can make your savings grow now.

So with everything now in place with your investments, what next?

It’s all well and good getting your finances in order and putting them into investments that will make your savings grow. But what next before you can reach financial independence?

Reaching financial freedom is not a get rich quick scheme. Even with everything in place and a fair wind, it will take a long time to reach financial independence. So the fifth and final step is to make sure you can keep on target and stay motivated as the months and years tick by.


Any information provided is not personal advice. You are responsible for your investment decisions and all tools provided are for illustrative purposes only. If you’re not sure whether an investment is right for you, contact a financial adviser. All investments can fall as well as rise in value, so you could get back less than you put in. Please remember, past performance is not a guide to future returns and that income is variable, not guaranteed.

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