This week I did my first proper investing, which was very scary. In the past, I have had an ISA and lent a bit of money via Zopa, but haven’t gone any further than that. After reading MrMoneyMustache‘s entire back catalogue, I became aware of the importance of investing, since with the poor interest rates on bank savings accounts I could pretty much kiss financial independence goodbye. Only the power of compound investing could save me.
My husband is not particularly interested in early retirement, so I looked at how much I might need to save to cover my share of our joint expenses. As you may know from this post, we are aiming to pay off our mortgage in the next few years, so I could leave mortgage or rent costs out of the equation. I estimated that I would need to save around £230,000 capital to produce around £10,200 interest per year, which would produce £850 per month (that would cover my current monthly expenses minus mortgage, plus a bit extra for inflation). I used an online compound interest calculator to estimate this, using a rate of 5% interest. This may be a bit ambitious, as I can’t clear 5% interest with Zopa, but I thought a proper investment ought to give a better rate of return. Zopa is currently offering 5% interest, but there is of course tax to pay on top of any profits from that, and it has previously been more like 4.5% anyway.
If my salary and our costs remain relatively stable, it will take me around 18 years to save up £230,000 in a normal savings account with 0.1% interest or whatever paltry amount is being offered these days. I therefore knew I’d have to take some kind of action, but where to start. MrMoneyMustache provides a lot of useful information for beginners in posts like this, but it’s focused and the US and not so easy to apply from the UK. I therefore turned to the UK investing guru that is the Monevator and his friend the Accumulator. I find Monevator’s posts to be pitched at a slightly higher level of investor skill than I currently have, so reading his posts can be a bit intimidating, but I persevered and took some action. The two main posts I followed are the guide to passive investing and How to buy your first index tracker. From the advice therein, I decided to open an Alliance Trust Savings account and invest some money in Vanguard LifeStrategy. I found the website to be a little bit complicated to use at first, but I think the purchase has gone through ok. The idea now is to be a truly passive investor, and just leave the money exactly where it is for ten years, no matter what happens on the stock market. I’ll let you know in 10 years if the strategy is successful!