As promised, the following is an article on the importance of discounting, what it is and how it is relevant to your savings and investments.

What is discounting?

If I was to offer you £100 today or £100 in one months time, which would you rather have?

Well the answer appears obvious. - £100 today please! But why?

£100 today is worth more to you than £100 in one months time  This is because you can invest your £100 today or put it into a savings account and so it will be worth more than £100 in one months time. Furthermore, the effects of inflation erode the value of that £100 over time, so the money is definitely worth less in the future.

Why is discounting relevant to your savings and investments?

The significance of discounting to your investments means that every £1 invested today is worth more than every £1 invested in the future. This also means that your investment returns are not as impressive as you may automatically think, since inflation erodes the value of that £1 over time.

As a result, when making investment decisions based on future returns of your savings and investments you need to factor in discounting, 

An illustrative example of discounting:

Let us assume you have invested £1,000 in a company that pays a very nice 5% dividend paid annually. You may naturally assume that in one year your investment will be worth £1,050 ignoring all transaction costs and taxes and assuming This is simply 1.05 X £1,000. After another year your investment will be £1,102.5. That is calculated as such: 1.05 X £1,050.

In reality your returns are less due to discounting and this fact should be taken into account when making investment and saving decisions. I believe that returns should be discounted in one of two ways:

1) The opportunity cost method

The logic here is straightforward. If you were not going to put your money into a particular investment, where else is a safe way to store your wealth? It seems clear to me that a safe place to store your wealth would be in a bank account (aside from the previous financial crisis - but that's another debate!).

The average savings account is currently paying about 1.75% per annum. This means that for every £1 invested you are missing out on the opportunity of keeping your money relatively safe and earning a 1.75% return. As such, for every predicted £1 made on your investment, we need to scale it by the opportunity cost  of gaining the risk free rate of 1.75%.

In the case of the above illustrative example, after the first year we would have made £1,032. This is worked out by dividing the cumulative gains after the first year (£1,050) by the risk free rate (1.75%), i.e £1,050/1.0175. The £1032, is the true value of your investment after one year.

2) The inflation method

Similar to the first method this scales your investment by inflation so as to give it it's true value adjusted for inflation. Since inflation is about 2.4% at the moment that would mean a calculation as such £1,050/1.024 resulting in a return discounted at the rate of inflation at £1,025. Check out a previous article for a clearer understanding of why inflation should matter to you in terms of investing. Essentially, inflation erodes the real value of your wealth over time. This discounting method takes account of that fact to produce the real value of your investment.

Other Possibilities for discounting

There is much debate over what percentage investments should be discounted at. I have provide reasons for two possibilities above. Let me know if you have any other suggestions.

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Comparing Mortgages and other Financial Products - Does it actually help?

The following article is a guest post that aims to aid it's readers in achieving cheaper mortgages and delves into some of the lesser-known benefits

Cheap mortgages

Many people in life say that you have to speculate to accumulate, but just how much do is too much?

For life’s most important purchases, saving money is imperative; especially if you’re forced to stay within a specific budget for fear of racking up debts. This is also true in business. Knowing the outgoings don’t outweigh the incomings is something that any business owner keeps an eye on.

When taking out a mortgage, loan or even something relatively minor like a credit card, getting value for money is something which in the long run could be extremely valuable.

If you are looking at creating a small property portfolio finding value at a time when house prices have remained sky-high for a number of years might seem like a thankless task.

House prices have slowed and remained steady albeit at a high price, which has proved frustrating for many house-hunters, especially first-time buyers. True can be said for the sellers as the higher prices meant that some houses have been on the market for more than two years.

Regional variations in mortgages make a difference

In the UK as a whole, the average house price is just a shade over £238,000, but this figure varies wildly in different parts of the country. In South East England, the average price for the last three months of 2012 was £279,593 while in Northern Ireland, it stood at a considerably lower figure of £138,966 for the same period – less than half the price.

Whatever the price of a home may be, the challenges for people seeking a mortgage in the UK are the same: finding a willing lender, getting reasonable interest rates and choosing a product which lasts for a palatable period of time. Going to the first bank or building society you see might seem like a quick and easy option, but a lot can be said for comparing products from different lenders.

Contrasting means coins!

Experts on personal finance suggest that comparing prices is the answer when trying to get a cheaper mortgage. To compare prices, there are a few things you could do, including:

·        Contacting lenders directly. This might seem time-consuming, but by finding out in detail what types of mortgage they can offer and how much they cost, it can give you a clear idea of what to expect – this is a must for any would be property tycoon as you may find that buy-to-let mortgages are harder to find.
·        Go online. Using a comparison site is also a good place to start as you can see the facts and figures all on screen. Sometimes however if you use a comparison site to find the best deals and contacting the companies individually may give you better rates.
·      Consider the types of mortgage available to you. Fixed rate, variable rate, capped rate and tracker are the four main types offered by the majority of banks and building societies, and vary in the rate of interest they offer for the duration of the mortgage. Many people who are looking to build property portfolios often use interest only options.

To make a more informed decision a mortgage broker can help and should steer you in the right direction when you are trying to get the cheapest and best mortgage possible.

It is possible for you to save thousands on interest payments in the long run.

Basic Wealth Creation for New Employees

Starting a new job and wanting to create wealth

The following article contains advice as to how you should set up your finances to generate wealth creation upon starting your first job. The following guide assumes that you are young, possibly in your 20s, this is your first job and your not sure how you should set up your finances to grow your wealth. This plan will also work if your already some way down your career path. You're never too late to start! However, you will probably have to commit to investing more in your pension pot and contribute more into your savings (assuming you can afford it).

Steps to build wealth

Follow the guide step by step to allow your personal finances to grow roots and then sit back and watch your wealth tree grow:

Step 1 - Find out what your gross salary is. It'll be your income, pre-tax, found on your employment contact.

Step 2 - If your employee has a pension scheme where they match your contribution then maximise the free money that they will give you. For example, my firm contributes 6% for every 6% that I contribute, so I contribute 6%. If your firm doesn't have a pension scheme then invest in your own pension scheme by finding a provider and contributing up to 10% if you're below the age of 30 and haven't had a pension before. Commit to 15% if you're older! See my previous article for the benefits of investing into a pension.

Step 3 - save a further 10%-20% of your net income (income after all your taxes). You can use an online tax calculator if you search in Google to work out your income net of tax. A lot of people may believe that that is too much to save but you will find that your spending adjusts accordingly. Set up your savings so that the day or two after your salary hits your current account, your savings automatically come out. I would advocate either checking with your current account provider to see if they have any "monthly savings" facility they can set up. Alternatively you can open a cash ISA account with your bank and set up a standing order to automatically withdraw funds from your current account and deposit into your ISA savings account.

Step 4 - make sure that you keep a constant update of your spending habits to make sure that you never go into your overdraft. If you're having difficulty with this then email me for help: Or else read my previous article for assistance on how to keep track of your spending.

Step 5 - open a cashback credit card to with which to transact all of your spending. This is once again free money that you are missing out on.

Step 6 - Consider opening a stocks and shares ISA trading account (with a cheep online brocker) with which to invest your pot of savings at the end of every 12 months. If you're not sure what to invest in, look for well known FTSE 100 stocks that pay you a dividend. Reinvesting those dividends every time you build up a substantial pot should aid your wealth creation. Resist the temptation to trade your shares. You're investing to build wealth in the long run so don't worry about the short term fluctuations in prices.

Step 7 - wait. Be patient and your wealth will grow over time. Read some of my articles entitiled "Multimillionaireroad Plan" to see how my wealth has slowly grown over the last 18 months.

As you can see, there is nothing fancy about building wealth. It is simply a matter of automating your finances and having patience. Good luck and let me know how you get on.

Do you like what you've read? Tell your friends by sharing it with one of the buttons below. Please post this to Facebook or Tweet it to help your friends and family. Feel free to send me an email (mrmoneybanks<at>multimillionaireroad<dot>com), find me on twitter @millionairer0ad or comment. Whether good or bad, I want to hear from you all.


Information on this site is not appropriate for the purposes of making a decision for carrying out a transaction or trade nor does it provide any form of advice (investment, tax or legal) amounting to investment advice, or make any recommendations regarding particular financial instruments, investments, or products.
Always seek advice of a competent financial advisor with any questions you may have regarding a financial matter