How To Boost Your Wealth

If your salary expectations over the next few years don't look great, here's some alternatives for boosting your wealth.

The prospects for earnings growth over the next five years don't look great, particularly if the forecast that earnings will only continue to mirror inflation turn out to be true. Combined income for the typical household could step up from £46,384 a year today to £55,368 by 2012. That sounds doesn't sound too bad but that rise will be no higher than inflation and we'll be no better off than we are now. Admittedly, there is one good piece of good news house prices are expected to fall over the next few years. And that could mean that housing is more affordable when compared to average earnings in 2012. However, that situation may change further out as house prices could pick up steam once again. If that sounds like a pessimistic prediction, you may want to take steps to boost your wealth in the long-term. Of course, there's numerous ways you can achieve that such as re-mortgaging to save money on what is probably your largest monthly bill. But here I'll focus on using investments as a way of boosting your wealth. If your finances are fairly typical then you'll probably have a reasonable lump sum lying about in savings accounts. According to research carried out by Prudential last year, the average person in the UK holds £14,103 on deposit. Now, that's all well and good. You may even feel rather pleased with yourself having built up a little money for a rainy day. But it may surprise you that the average returns from cash savings are, well, pretty pathetic. The figures below are taken from the Barclays Equity Gilt study 2007 and show the returns over different periods for each of the major types of assets: Asset 2006 10 Years 20 Years 50 Years 107 Years Equities (Shares) 11.4% 4.9% 6.9% 7.1% 5.3% Gilts* -4.4% 4.6% 5.6% 2.2% 1.1% Corporate Bonds** -4.5% 6.7% - - - Cash 0.4% 2.6% 3.7% 2.0% 1.0% Source: Barclays Equity Gilt Study 2007. *- Gilts provide a fixed interest return from Government bonds. **- Corporate Bonds provide a fixed interest return from company bonds. You may be surprised to find the average cash deposit returned just 0.4% in 2006 while shares produced significantly stronger growth of 11.4%. Over a longer ten-year period, shares continue to outperform cash returning 4.9% a year while cash scrapes by on just 2.6%. Indeed shares do better than cash and gilts/bonds over every timescale shown. These figures have been adjusted to take into account the affects of inflation (rising prices) and therefore provide 'real' returns. The study also goes on to find if you invested for 2 consecutive years, shares performed better than cash in 71 out of the 107 years for which data is available. So, the probability of shares producing a greater return than cash is 67%. What's more, if you invested for a period of 10 consecutive years, the probability of shares doing better rises to 93% and over 18 years the chances are 99%! But I'm not suggesting you take all your savings and recklessly throw the whole lot into the stock market. For one thing, it makes sense to maintain an emergency fund. Usually it's a good idea to hold back, say, 3 month's salary in an easy access savings account to cover the unexpected, such as a sudden redundancy. You might also want to keep some savings for expenditure such as car repairs and holidays. So make sure you have a cash reserve that you're comfortable with. But cash beyond this left on deposit is really not doing much for you in terms of providing a decent return. A Foolish Favourite For this surplus amount I would suggest you seriously consider making it work harder for you by setting up stock market based investment. One of the simplest ways of doing that is to use a Foolish favourite: an index-tracker fund. An index-tracker fund is essentially a share-based unit trust investment which invests in all the companies quoted on a particular share index with the objective of mirroring or 'tracking' - its performance. In other words, if you invest in a FTSE 100 tracker fund, your money will be invested in all the top 100 UK companies and if these companies perform well your investment will rise in value too. But, as with all shares-based investments, if those companies perform badly then your investment will fall accordingly. You should be aware that while shares tend to grow more in value than cash over the longer-term, this type of asset is much more risky. Cash held in a savings account, on the other hand, is completely guaranteed with interest earned on top. But if you're prepared to take that extra risk you could enjoy the reward of a higher return. Better still, if you haven't already done so, you could invest your lump sum into an index-tracking ISA fund, which means you'll also enjoy generous tax breaks. You can invest up to £7,000 into a stocks and shares ISA this tax year - plus an additional £7,200 from 6th April 2008 - which will be boosted even further by growing tax-free and there's no tax to pay when you cash it in either. Remember, if you're going to have a stab at investing in shares remember that 'time' is important, not 'timing'. Even experts have trouble second guessing the stock market, so don't even try. But, by investing in a well-diversified fund, such as a tracker, and leaving it for the long term, you could enjoy far better returns than your old savings account could ever achieve. If you're already comfortable with stock market investing why not open an account with The Motley Fool Share Dealing Service which allows you to trade shares cheaply and simply. You could also place your share purchases within an ISA wrapper via The Motley Fool Self Select ISA.