New Year resolutions that could make you rich

David Prosser explains how investment company savings schemes can help turn regular savings into a valuable long-term investment.

What’s the true value of achieving your New Year’s resolutions? Well, apart from the smug satisfaction of succeeding where others have failed – don’t underestimate the value of that – the financial benefits of many resolutions are far greater than most people realise. Your resolutions might include giving up smoking, cutting down on drinking or even going running rather than occasionally using an expensive gym – all of these will reap sizeable savings. And the power of compound interest is such that if you successfully invest this cash, its value will multiply rapidly.

The financial rewards of virtue

Take a look at the following example, if you’re already finding it difficult to stick to your promise to stop smoking for 2019 (or to give yourself a reason to try again if you’ve already fallen off the wagon). The sheer scale of the numbers will give you added motivation.

The cost of a 20-a-day smoking habit is close to £300 a month at current prices, or £3,600 a year. So the savings from giving up cigarettes add up very quickly, even just looking at what you were previously spending on them.

Invest those savings wisely, however, and you can really begin to see what packing in smoking might achieve for your finances. Invest that £300 each month into a stock market fund that produces an average annual return of 4.5 per cent and you will have more than £19,800 after five years. After 10 years, the total would be £43,500. And 25 years on, your investments would be worth just short of £147,000.

These are staggering amounts of money. How many people would expect to be able to build a nest egg worth almost £150,000 by making one simple lifestyle change? And while smoking is, for most people, the most expensive of their bad habits, the savings from other resolutions can mount up quickly too. Cut down on two expensive cappuccinos a week, say, and you’ll find yourself £25 a month or so better off. Cutting back on the booze, replacing the gym with exercise outside or just giving up sweets will all generate extra cash for investment that build up to very substantial sums over the longer term.

Become a disciplined saver

The key here is to grasp the importance of long-term savings and investment – over time, even relatively small amounts of money build up into large sums. There are no guarantees, of course – what you end up with will depend on exactly how your investments perform, but compound interest is an enormously powerful phenomenon.

Even if you haven’t made a New Year’s resolution for 2019 that is generating savings, take the lesson of these examples to heart. If you can find even small sums to invest each month – and you’re prepared to take a really long-term view of your savings – you can build a much more substantial portfolio than you might imagine possible.

The secret is discipline – being prepared to make that regular commitment over an extended period and also to leave the money invested. That’s not to say you shouldn’t review performance regularly – at least once a year – to ensure your money is working as hard as possible, but the longer you leave savings invested, the more chance compound interest has to work.

Equally, note that compound interest works in reverse too, which is why it is so important to make sure you’re not paying uncompetitive charges on your investments. Over the long term, even small differences in fees can make a significant difference to the value of your savings.

Could an investment company be the answer?

How, then, to convert regular savings into long-term investment in practice? Well, an investment company savings scheme is one possibility. These plans, available from most investment companies, allow you drip-feed small sums into your savings with a regular monthly deposit – as little as £25 in some cases.

Setting up a regular savings scheme in this way, with a direct debit to automatically channel your money into a new and more productive home, offers you a means to convert New Year virtue into long-term financial gain. Money you were once frittering away on vices can now be put to work for your future.

Investment company savings schemes even offer one additional advantage. While you’ll be investing for the long term – and saving money you would previously have spent in any case – you may still be worried about short-term volatility. The ups and downs of the stock market can be unnerving. Regular savings plans, however, offer some protection by smoothing out returns: in bad months for the markets, your fixed monthly investment buys more shares in the investment company, which then rebound in value when better times return.