19/11/2022
Raising capital for an investment
In the previous articles, we highlighted why we all need to invest and discussed some of the investment opportunities out there. It's worth noting that we barely scratched the surface. There is, literally, a world of opportunities out there for those who wish to explore this topic further.
Once you've gotten past the idea that you need to invest for a brighter future, raising funds is the next challenge you will likely face. Unless you are the lucky recipient of inheritance money, have a pile of savings waiting to be set loose or are otherwise well-endowed, you will probably need to save to invest. Saving, though, can be a challenge if you don't have the skill for it. It sounds outrageous, doesn't it? Yet few will disagree that saving consistently is challenging. If you don't have a plan and aren't disciplined, saving is almost impossible, and the statistics bear this out. In 2020, 1 in 10 Brits had no savings, and a third had less than £600 in their savings accounts. The story in the US was no different; 42% of Americans had less than $1,000 in savings. With the cost of living rising astronomically, saving just got harder. Yet if we are to achieve our financial objectives, we cannot afford not to save.
From a common-sense perspective, saving should get easier with rising incomes, yet this doesn't seem to be the case. According to the Organisation of Economic Cooperation and Development (OECD), the average rate of saving in the UK was just 2.69% in 2006. This rather disappointing statistic improved during the financial crisis of 2008 and peaked at 6.16% in 2010. Yet, by 2019 the savings rate had fallen to -1.64%. Simply put, most people were spending more than they earned. It turns out that people save for a rainy day rather than saving for a brighter future. As the economic outlook worsens, this behaviour intensifies. The idea here is to prepare for much worse times than you are currently experiencing. Case in point; household savings rose to 7.48%, the highest in modern history, during the pandemic.
There's nothing wrong with saving for a rainy day. Indeed, we can't afford not to, but saving for harder times only keeps you at the subsistence level. As the farmer who grows enough to feed his family and keeps back enough for the following year's crop never gets above the poverty threshold, the one who only saves for hard times never experiences prosperity. If we want to stop living from hand to mouth, there is no getting away from setting aside a bigger proportion of our incomes for investing. And if you are not earning enough, look for additional income sources. In the age of the internet and social media, starting a side hustle has never been easier.
How to start saving
It is tempting to approach saving as a simple numbers exercise where you set aside an arbitrary amount at the end of each month and transfer it into your savings account, but you've probably tried this approach already and made little progress. Invariably, the money in your savings account has somehow ended up in your current account. In the end, you've concluded you need a higher income to be able to save. Trust me; I've been there.
We find saving hard because it isn't the simple numbers game, we think it is. The pressure on our incomes means that keeping back some of your money for investing requires more than willpower; you also need a strategy, and the first step to having one is getting to grips with your outgoings. You need to note the amount spent on food, clothes, entertainment and debt repayment if you have any debts. Expenses must be managed and debts consolidated. In a nutshell, you must set your finances in order.
Reduce your outgoings
I remember a time when we had no access to cable TV, no dishwasher and no car. We hardly ever ate in a restaurant or went to the movies or a café, yet, we had some of the happiest moments of our lives. And many of you can testify to a similar experience. Modern comforts are what they are; comforts. They make our lives easier, but they do not guarantee happiness, and neither are they always essential. And the sad part is that these non-essential expenses eat into our resources, making investing harder.
To become effective savers, there is a need to tell our needs apart from our wants. I would suggest taking a good look at your home, surroundings, and lifestyle and asking these questions; "Do I need to drop by Starbucks or Costa Coffee on my way to work? Do I need a takeaway every weekend? Do I need a TV in every room in the house?” Don't forget that each electrical appliance consumes energy and will rack up bills.
What about the car loan you took when you were feeling rich? That car has lost its new smell and no longer excites, yet, it must be paid off. Are you better off returning it to the dealer and purchasing a cheaper second-hand model instead?
List your monthly outgoings and group them into essential and non-essential expenditures. Now, ask yourself this question; "How will my life be affected if I forgo my non-essential expenses?" And if you have debts, go a step further and ask, "Which expenses can I forgo and still live."
I like the Dave Ramsey approach. In his show (available on YouTube), he advises callers to sell cars purchased on credit and resort to a rice and beans diet. And if they dislike rice and beans, they can opt for beans and rice. As for going on holidays, they might as well forget it; being in debt and going on holiday are incompatible, he argues
We may not go as far as prescribing a diet or stopping you from taking a holiday, but there is no mistaking the fact you cannot improve your current financial situation without making adjustments. The having your cake and eating it approach just doesn't work.
Another way to reduce your outgoings is to find cheaper brands of goods and services than the ones you currently consume. You can also find better deals for car insurance, home insurance, mobile phone, cable TV, and utilities by simply switching providers. Use Uswitch, www.comparethemarket.com, and www.gocompare.com to find the best insurance deals when it's time to renew the policy. Finally, don't forget to discuss this drastic change of philosophy with your spouse. Making such drastic changes to your lifestyle won't work without everyone's cooperation. Above all, stay focused and vigilant because expenses have a way of creeping up when you are not watching.
Have a lovely day.
