Whilst Einstein was correct, the eighth wonder fails to account for inflation – the annualised increase in the cost of living.
Compound interest is great, but we need to apply a reality check and remember that interest rates on savings are rarely at the same level, or higher than inflation. Therefore most of us shouldn’t hold more in cash than the combined value of our emergency fund and our savings for specific short term (five years or less) purposes.
Before considering investing, it’s important to think about debt. Sensible investment strategies usually reward you with less than the equivalent amount of debt would cost you on things like vehicle finance, credit card interest payments etc. So, before thinking about investing, think about paying down your debt.
When people tell us they want to invest our favourite question is “why?” Why do you want to invest? Perhaps you’re trying to beat inflation, but again “why?”. OK, we know that a diversified investment solution always tends to do much better than cash over the longer term, but, “what are the objectives you’re trying to achieve and how realistic are those goals?”
Deciding where and how to invest is a daunting task and it’s important to remember that there is no one size fits all.