When I was a kid, my mum always said that if she won the lottery, she’d put the £1million in the bank and live off the interest.
And back then, it was a very sensible idea.
In the 1980s, The Bank of England Base Rate (which directly affects mortgage interest rates) were between 8.5% and 17%. Which in turn meant savings rates ranged from about 6.5% to 13.8%.
So that £million in the bank would have earned interest of at least £65k a year. Which was much, much more than our household income!
Times have changed a LOT since then.
I’m sure my mum couldn’t have imagined anyone winning more than £1million.
Or that if you left that £million in the bank right now, it would only earn somewhere between £100 – £1000 interest per year (and no, that’s not a typo) – compared to the £65k you used to be able to enjoy. And I don’t know about you, but I couldn’t live of the interest if I’m only getting it at that level.
So WHY don’t you get that interest on your savings these days? And why is it a problem?
Interest rates are at a historic low…
Which is great for those of us with mortgages.
Just imagine how high your mortgage payment would be if rates were at the 1980s level now (a £200k mortgage over 25 years at 1.5% in 2020 = £800 a month…in the 1980s you’d be paying £1351-£2800 a month!).
But it also that means savers don’t get a decent return on their savings.
Why?
In simple terms – the money that savers deposit in the bank is used to lend out to mortgage borrowers. And the lender passes on a share of the interest charged as a reward for leaving your money on deposit.
Except they’re not getting much interest in the top end (due to low interest rates) so choose to pass on very little of it (0.1-0.01%) on to the savers.
So being able to live off the interest if you win the lottery now (even if you win £14million) just isn’t going to allow you to have the lifestyle you want. Unless you can live on £1400 a year.
And that’s before we consider inflation, which is eating away at the purchasing power of your money!
In real terms – if you’re NOT getting a return of 2% or more on your money, then you’re actually losing money.
So that £million in the bank will only be ‘worth’ £980k next year – yes, £20k dropping off the value in a single year – and then it continues. £960k…£941k…£922k…£903k…
After just 5 years, the buying power of your money will have reduced by nearly £100k, because the price of things goes up each year (despite the bank statement still saying £1million).
THIS is why we don’t leave money we’ll want in the long term in cash.
Yes, we might keep the money we’ll need in the next few years in savings (tax money, your emergency fund etc) – but the rest of our monthly surplus income needs to be invested, so that it grows to match or beat inflation.
Which done in the right way, can mean that one day you get to live off the growth.
Like my client Debra, who draws £24k a year from her investments. But the pot is still worth more this year than last year, because the pot is growing at 7.65% (after fees and charges) in a reasonably cautious fund. So she’s just taking out the growth and leaving the original investment to grow.
This probably leaves you wondering how big her pot of investments is. It’s around £500k – totally within reach of so many business owners.
But you’ll need to choose how much to invest and in what.
If you put in £40,000 as a lump (from the surplus sitting in your personal or business savings) plus £500 a month for 20 years, you’d have £526k (at the growth rate above).
And £500 a month is only 6% of your £100k income. If you were an employee, you and your employer would be paying in 8% on an auto enrolment scheme like NEST.
You’d have only put in £160k – the other £366k is your compounded growth.
Into a well-diversified, tax efficient portfolio, without taking unnecessary risk and jumping on the latest bandwagon.
As Warren Buffet said ‘nobody wants to get rich slowly’. BUT what’s the point of taking more risk than you need to and end up sitting on the edge of your seat, desperately hoping that your life savings won’t go up in smoke?
Or is that better than them being eaten away by inflation, just sitting in your company account doing nothing?
You’ve made (and are making) this incredible amount of money… and now it’s time to put it to work for you.
Crunching the numbers and forecasting is part of creating your Strategic Wealth plan. And it’s the key part of my signature Wealth Builder Experience, for coaches and experts earning at or around £10k a month.
Working 1:1 together over 6 months, we create a flexible plan that puts your money to work, whilst leaving you feeling protected and truly wealthy along the way.
Once you clearly understand how much you need to put away and the options available, you can then choose to self-invest your money (once we’ve found the product you’re comfortable with)…
Or ask us in our FCA regulated capacity to set things up for you (I’m a fully qualified Financial Adviser, trusted to look after over £4million client assets).
If you’d like to find out more about the Wealth Builder Experience, just click here now to get in touch or click here to message me personally on Facebook.
We’ll have a chat to see if it’s the best fit option for you and can get you started as soon as you’re ready.
Because doing nothing these days really isn’t an option (not when you work so hard in your business to make the cash in the first place)…
Here’s to beating inflation and making your money work seriously hard for you… so that maybe you CAN live of the interest after all!!!
Until next time,
Claire