Beauty is only skin deep, so invest in a sound future plan

Superwomen: Superwomen, let's talk money. Lucy wanted to be beautiful. Not just now, in her 30s. She wanted to be beautiful her entire life. She wanted to be like Kat, who was older but still looked super-stylish.

Lucy wanted to be beautiful. Not just now, in her 30s. She wanted to be beautiful her entire life. She wanted to be like Kat, who was older but still looked super-stylish.

Kat had inspired her, but the reality was that for Lucy to maintain her looks was going to cost, so she was determined to get a grip on her investments. That way she could have her Jimmy Choos, her Botox, her anti-ageing supplements, well, for ever.

As far as she was concerned, her dreams of Prince Charming turning up and paying for this were exactly that - dreams. She wanted to ensure she could afford to look after her looks.

House in order

Lucy earned good money as the chief executive of a successful advertising agency but, before she took her finances in hand, she was spending all her income and even going into debt.

Thanks to a bit of effort and a few sacrifices, she had managed to channel most of her monthly salary into paying off her credit cards. On top of that, Lucy had embraced Sasha's "charm change" concept exceptionally well. She woke up every morning feeling fab and fresh, she was still investing in things that were important to her, but no longer spending wastefully.

"Getting my house in order has really saved me money," Lucy told Abby. "I've saved thousands." So still living a nice life, but with a new financial attitude, she was ready to invest. "So, Abby, believe it or not, I'm ready to talk money. What's the best investment?"

Choose your weapon

"There is no such thing as the best investment," Abby said, sounding like her old self. She had been off work for six weeks and driving her friends crazy. It was time for her to get back to work, and with Lucy eager to take the next step in wealth creation, the timing was perfect.

"I can't possibly tell you what the best investment is for you until you and I have identified your goals and your life plan," explained Abby."We need to work out where you want to be in 15 years, and how much you want to live off at 60 when you retire."

"Well, I want to be able to afford to be beautiful and stylish," said Lucy. "OK, so how much do you reckon that will that cost," asked Abby. "Umm, I don't know," said Lucy.

"And what will happen to inflation between now and then," Abby inquired. "I'm not sure," Lucy admitted.

"We've certainly got some work to do," said Abby. "Are you up for it?"

"Absolutely," said Lucy, on a mission. "Let's get to it."

Top tip

The "best" speculative investment could be very different to the "best" investment for your life savings. What are your timescales? What is your capacity for loss? What's your previous investment experience?

Be aware that there are two ways to answer the "best" investment question:

Ÿ The sure thing that isn't. It could be gold, China, Brazilian rainforests - anything. But generally, if an adviser tells you that something is a "sure thing", remember that it is unlikely to last beyond the next fad.

Ÿ The right response: An adviser should explain that there are no right answers to such a question. The best investment for you depends on a wide range of factors. Are you looking for a purely speculative investment or are you talking about an investment for your life savings?

Using the United Kingdom as an example, inflation averaged 2.72 per cent between 1989 and 2010. That means that a £1,000 (Dh5,620 at current conversion rates) purchase in 1989 would cost you more than £1,750 in 2010.

Extrapolate that for a further 20 years, until 2030, then the same purchase would cost you at least £3,000 - three times as much. It doesn't take a rocket scientist to work out that if we want to enjoy the same spending habits as we do today in 2030, we need to earn three times as much.

If we look at inflation over the past 10 years, it has risen by a global average of about 5 per cent per year. Some governments tell us there is no inflation - but a quick look at the basket of goods US$100 (Dh367) buys you today compared with 10 years ago tells a different story.

Put simply, in 2002, the cost of a mid-range washing machine was $500. In 2012, that machine would cost $815 (inflation at work at 5 per cent a year).

Now if we consider that inflation continues to rise at this same rate (5 per cent annually) until we retire, and we wanted to live off our current income today, we would need to factor inflation into that equation.

In Lucy's case, if she wanted to retire on her existing Dh80,000 per month in 15 years, we need to first work out her annual income, which is Dh960,000.

Using a compound interest table, we can calculate that an annual 5 per cent inflation rate for the next 15 years will turn that into Dh1,995,744 a year or, put another way, in 15 years, Dh1,995,744 will be required to buy what Dh960,000 can today.

Lucy's goal is for her investments and wealth planning to grow to reach that rate.

Why not take action now and start saving or at least find more money to save each month?

Janelle Malone is a writer, blogger and commentator on personal finance. You can contact her at www.womenmoneyandstyle.com