One of the main lessons that ‘Money Mum’ tries to teach is that we can all passively make a small fortune for ourselves using the ‘cappuccino factor’. A simple saving strategy using unit trusts, if you haven’t seen it before (free on our website). We hope that one day everyone will be able to use it, solving pension troubles and giving people some financial security. Although we try to get this strategy to as many people as possible, by lobbying and visiting schools, it is hard to get the word out to everyone without a little help. However, recently I’ve started to see some recognition in the media of how much potential there is in investing savings. I’m going to take examples of this from a series of ‘Times’ articles that came out over the last month that back up our strategy and support our goal of getting people investing.
First important aspect of the ‘cappuccino factor’ is to start early. ‘The Times’ recently ran two articles giving exact figure for how much you have to save to have a considerable pot for when you retire. The key point to their figures is that they rise considerably the later you leave it to start. However, they still give figures for starting later in life, and although they are high it’s important for people to know its never too late. Another bit of interesting research they did is that if you invest for people under 18 you should let them know where the money is going. By discussing investing with children, you can increase the chance of the child continuing the investment when they turn 18 and even of contributing themselves.
The second key goal of the ‘cappuccino factor’ is returns. We aim to make around 8% with our investing, but they only suggest 5%, quite conservatively. However, the most important thing, as they say in the articles, is that we have higher returns than inflation, which is currently 2%. To make our investment goals we need to make sure we compound, this is why it’s so important to start early. The article even refers to this as the ‘magic of compounding’ just like us.
The third important factor is how to invest. We recommend investing in equities, specifically FTSE shares. We use unit trusts that follow the FTSE all share. Similarly recommends a few funds all using equities. This is because the stock market rises over time, by investing in funds that follow the market we can take advantage of this gradual rise. Although we don’t explicitly say it in the ‘cappuccino factor’ strategy, an option we cover more in advanced training is the utilisation of tax-free vehicles. A great way to get greater returns, by avoiding tax, is by using an ISA (individual savings account). A few articles from the ‘Times’ recommend a few ISAs. They discuss the other advantages of ISAs, that they have a £20,000 allowance and the government will top up any deposits we make. This is a great thing for them to make light of as not many people know the ways the government help investors.
One aspect we discuss that they forgot is the SIPP (self-invested personal pension). This is like an ISA but cannot be accessed until we turn 55. However, this shouldn’t matter as this article talks about the importance of using these savings as a pension replacement/ supplement. This is exactly like our strategy as we also understand that state pensions cannot be relied upon, especially nowadays when people tend not to stay in the same job their entire career. Some great research they did is working out how much you get yearly with a pension. A full state pension when spread over 35 years only allows results in £8,546 a year. This becomes an even worse problem in the future as life expectancy increases every year. However, with a pot of just £500,000 (which we can easily beat with the ‘cappuccino factor’) we can beat the state pension by dividing it into £14,285 per year. This is where the real beauty of the ‘cappuccino factor’ comes in though. With a pot of £500,000 invested we can keep the fund going and withdraw £20,000 a year without decreasing the overall pot, this is called a drawdown. So, either way you split it small regular savings invested into equites can beat the state pension.
Recently the figures from the last 10 years came out for the FTSE index. It provided a 16.8% return as long as we compound. This far exceeds our expectations and the ‘Times’ suggestions. Although these articles have tended to undershoot how much we can make and how much we’ll end up with, it’s great that simple investment strategies are getting big writeups in the media. One of the articles even uses the same analogy of a cappuccino a day resulting in £50 a month. So, it feels great to get mainstream confirmation of our strategies. If you want to learn how to put the ‘cappuccino factor’ into place check out the money mum website.