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Regular savings – the key to building wealth

Regular savings – the key to building wealth

We all have the capacity to be extremely imaginative when it comes to inventing reasons not to save regularly! After all, who wants to deny oneself the pleasure of spending money on the things we want today, and instead regularly saving money for some unknown purpose in the future?

The reality is that saving money regularly is a cornerstone of building future wealth. When people instead employ a strategy of only saving when windfalls happen, there is no saving habit built up. When those windfalls happen and because the norm is to just spend money, the saving element is usually reduced in these instances too.

“Regular” saving can mean different things to different people. For most people it means putting money aside every month. For others who maybe receive a nice annual bonus, it might mean saving a portion of this each year rather than spending it all immediately on a holiday, some nice equipment for the house or putting it towards a new car.

But apart from regular saving resulting in higher levels of money actually saved, it also tends to result in better returns from your saving. This is down to a concept known as Euro Cost Averaging.

Let us explain… You see, saving a single windfall amount rather than regular saving actually increases your investment risk. This is based on a belief that you should never try and time your entry and exit when it comes to investment markets. We have seen time and time again people seeing markets racing ahead and as a result believing it’s a good time to buy in – just when the market is expensive. Or when markets have fallen, people believe that it’s not a good time to invest as they may lose money and stay out – when markets are cheaper.

Making a regular contribution delivers Euro Cost Averaging, which significantly reduces this risk. If markets have been performing poorly, well then you are buying in when prices are low – just where you want them to be when you are entering the market. Of course if instead markets have been steaming ahead and you have a nagging doubt that they may be near their peak, they are now relatively expensive. However with a monthly saving, you are now only committing one twelfth of your full year’s saving amount into the market at that time, rather than potentially the full amount. So in effect your regular payment strategy is smoothing your entry points into the market and as a result reducing your investment risk.

Regular saving usually ends up with higher amounts of money saved, along with a reduction in your investment risk. Both of these will result in more money for you. This is why regular saving is the key to building wealth.

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