Meet John, a 35-year-old male who lives with his wife and 2 young children. They rent a lovely three-bedroom apartment in Chelsea, London. He works in the city and earns £4000 per month as a contracting IT consultant.
After paying all his expenses John roughly has £450 disposable cash at the end of the month and wants to do something with it. What would be the best way to invest this £450 so John can feel like he’s getting the best return on his money? Most investment advice floating around on socials is crypto currency.
Crypto currency was first released in 2009. It’s since seen very high returns, sometimes as high as 1000% which can’t be ignored but can be very volatile.
Verses the good old UK stock market which began in 1801 the more slow and steady investment vehicle depending on your risk appetite the average annual return is 7.5%.
Always lean towards that “Personal finance is more personal than finance“.
Everyone has a unique personal life and what works financially for one person doesn’t always apply to another. In this case we need to consider that there are way more variables to John and his family finances than just looking at his £450 disposable cash before making a bold suggestion.
Let’s break it down
Possibility 1
John is 35 years old that would mean he roughly has another 35 years of working life ahead of him. That begs the question is John investing enough into his pension? and what type of lifestyle does he envisage at retirement? The average pension pot by the age of 35 should be at least £30,000. A high growth fund would give him £495,000 to retire on. Let’s also consider inflation is this still enough?
Possibility 2
John has a wife and two young children. Having children can be financially demanding. The moment you are blessed to bring those little bundles of joy home, the money will start flowing out of your pocket. The childcare costs alone are expensive not to mention everything else. Let’s consider John might want to pay for the kid’s university or start investing for their future this might also determine where a portion of that £450 goes.
Possibility 3
Johns and his beautiful family rents a 3-bedroom apartment in one of the most expensive places to live in the UK. How long will it be before the rent increases? Are John and his wife planning on owning a home at some point? What would it financially take to make that a possibility? The average deposit in the UK is 15% of the asking price. So, you can imagine what 15% of a London house would be.
Possibility 4
He works as a contracting IT consultant in the city. The key word is contracting, this means there’s an added risk to his job security. How long is the current contract going to last? Does John need to put this disposable £450 away to build an emergency fund? How much is 3 – 6 months of his household expenses? Just a few questions to consider.
We can see life situations that dictate how you can spend, save or invest money.
Life happens and we need to stay financially flexible so we don’t trap ourselves into putting all of our eggs into one basket, or even failing to start collecting the eggs in the first place. It’s a good idea to always have liquid cash for opportunities to invest or just as a rainy day fund.
I believe everyone should tailor their finances to suit their personal lifestyle. It would be foolish to suggest that John follows the same financial advice that could be given to a single 25-year-old male living at home with his parents.
It’s evident that time, income, expenses, and knowledge are the main drivers into making a successful investment choice for you and your family.
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