So let's say you want to get started with this investing thing. You might have a bit of money saved. It's probably not enough for a house, but you reckon I should probably invest this in something. Maybe you've heard on the news about Tesla or Netflix or Amazon and how, if you'd invested 10 years ago in Tesla then you'd be a millionaire by now or things like that. But if you're new to the game, this whole investment thing can seem like a really complicated black box. Like, how do you even buy a stock? What even is a stock? Do you just go on tesla.com and buy some Tesla, like, how does it work? And if you try and look into this, you get all these acronyms being thrown around like Roth IRAs and 401Ks in America or like ISAs or LISAs in the UK. And on top of that, there is the anxiety that we all have that I know investing is risky and I don't want to lose all that money. So in light of all of that, this is the ultimate guide on how to get started with investing. It is the article I wish I would have had five years ago when I first started investing in stocks and shares. And we're gonna cover this by thinking about investing in some different bite size steps.
So the first one is forgetting about investing completely and just thinking about what happens to my money over time by default. And if you've studied economics, you will know that your money loses its value over time. Thanks to something called inflation. Inflation is generally around the 2%-2.5% mark. And so that means that every year stuff costs about 2% more than it did the year before.
For example, in 1970, in America a cup of coffee cost of 25 cents. But in 2019, that same cup of coffee costs $1 59. That is inflation in action. And so let's say you've got a thousand pounds in your hand right now. And for the next 10 years, you just stash it under your mattress. And you never look at it again, in 10 years time your thousand pounds is not gonna be worth a thousand pounds anymore because everything would have increased by 2%ish every year. So the value of your money will have fallen. And so if you put your thousand pounds under your mattress for 10 years, you will lose money over time. And this is obviously not good. Even if you put your money in a savings account, like these days, a savings account will give you like 0.2% interest which means your money goes up by 0.2% every year. But because inflation is up by 2% you're still losing money over time. And again, this is not good.
Okay, so that begs the question which is key point number two which is how do we stop our money from losing value over time? And the answer is that if we had a hypothetical savings account, one that was let's say an interest rate of 2.5% that would match roughly the rate of inflation. So inflation means everything goes up by 2.5% in terms of price. But our money in our savings account also goes up by 2.5% each year. Therefore we're technically not losing money over time. If you're reading this and you have an issue with the word interest, don't worry stick to it for now, investment is not the same as interest but we'll come back to that a bit later. But the point here is that we don't just want to not lose money which is what happens at our 2.5% rate. We actually want to make money. And that brings us on to question number three which is, well, how do we actually make money? Now, let's go back to our hypothetical savings account. If hypothetically, we could have a savings account that was giving us a 10% interest rate this will never happen because that's just way too high. But hypothetically if it did, that means that every year we'd be making 10% of the value of the money in our savings account.
So for example, if I were to put a hundred pounds in a savings account right now the next year it would be worth 110. And then the year after it will be 121 because it's 10% of then 110, and then it would be 130 something. And this would very quickly compound so that in 10 years time, my 100 pounds will have become 259 pounds. And if we adjust for inflation that our money is still worth 206 pounds in 10 years time, this is pretty good. We have more than doubled our money, by just putting it in this hypothetical 10% interest savings account. And it really doesn't seem like it would do that because 10% feels like a small amount of money. But if you extrapolate 10% over 10 years you actually double your money, which is pretty awesome. Sadly these hypothetical 10% saving accounts don't really exist, because it's just way too high and real life is not that nice.
These days, most savings accounts in the UK and I imagine around the rest of the world as well, offer less than a 1% savings rate, which means you're actually still losing money over time. But we do have other options to try and get us to this magical Nirvana of like, you know, this 10% saving thingy. And that is where investments come in.
So point number four is what is an investment? And the answer is that an investment is something that puts money in your pocket. For example, let's say you buy a house for a hundred 1000 pounds and you want to rent it out to people. There are two ways, that's an investment. There are two ways you're making money from it. Firstly, let's say you're charging some rent to the people living in your house. Let's say you're charging them 830 pounds a month. That becomes 10,000 pounds a year. And so every year you're making 10,000 pounds in rental income, which is 10% of what you originally paid for the house. That means that in 10 years time you'll have paid off 100,000 pounds that you've put in because you're making 10K a year. And beyond that every year you're just making 10,000 pounds in pure profit. So that's pretty good. But secondly, it's an investment because the value of the house itself would probably rise over time. In general, there is a trend in most developed countries that house prices tend to rise over the long term. And so your house will probably be worth more than a hundred thousand pounds in 10 years time. And in fact in the UK, historically in the past, some people have said that house prices have doubled every 10 years. So maybe your house is worth close to 200,000 pounds. And so you've made money off of the rental income but you've also made money off of the capital gains which is what we call it when an asset increases in value over time. But the problem is that buying a house is a little bit annoying. You need to have quite a large amount of money for a deposit. You need to get a mortgage. You need to actually have the house. You just sought out the rental management, rented it out to people, all that kind of stuff. If only there were a way of investing without a, having a large amount of money to start with and b, without having to put that much effort into managing the assets as well. And that brings us on to investing in shares And for me, basically, a hundred percent of my investment portfolio is entirely shares. I have a tiny percentage in Bitcoin and I own this house but I don't consider this house an investment. I'll talk about that in a different video. Therefore number five is what are shares and how do they work? So buying shares probably as close as we're ever gonna get to this magical savings account that just returns some amount of money each year. And the idea is that when you buy a share you are buying a part ownership of the company that you've got the share in. For example, let's say Apple has a particularly profitable year because lots of people have well iPads as per my recommendations and because Apple is feeling kind, they are choosing to pay out a dividend to their shareholders. So for example they might say that they're gonna issue a dividend of a million pounds, and that's gonna be split evenly amongst whoever owns shares in Apple, based on how many shares they own.
So for example, if you happen to own 1% of Apple you would get 1% of that dividend that they've issued. So 1% of a million pounds, which is 10,000 pounds obviously no one watching this actually owns 1% of Apple, unless Tim Cook, you're reading, I don't even know if you own that much because that would make you an extremely rich person because Apple is a very valuable company but that's basically how the dividend thing works. A company decides to issue a dividend as a way of returning some of its profit back to the people who have invested in the company. And therefore you make money through dividends.
