The first step to making an investment if you don’t have much in the way of funds is to start saving. It will be tempting to try to jump straight in but one of the most important parts of successful investing is patience. The more money you have behind you, the greater your options. It can be very daunting to look at your finances and see that you have very little put aside but you would be surprised at how quickly savings can add up when you make regular contributions. When trying to invest with little money you will have to start slow but it won’t take long before you are in a position to start putting your money to better use.
Open a savings account
If you don’t have one already, open a savings account so you can keep the funds you intend to invest separate from your current account. This doesn’t necessarily have to be with the bank you have your current account with. Browse online to see which banks are offering the best rates. Many will offer better interest rates if your account balance increases by a certain amount each month (£100 a month for example). See what works for you in order to maximise your interest returns.
Set up a standing order
Once you have opened your savings account, set up a monthly standing order so that a portion of your wages goes into your savings account every month. Don’t be too ambitious to start with or you are likely to dip into your savings if you run low on cash at the end of the month. Start with an affordable amount then increase it if you find you can afford to. The important thing is that regular payments are going into a separate account which you do not touch (except to invest!). If you struggle to save money, look at ways to cut back on spending and immediately start saving.
Grow your savings
Now you have made a start you should look to try to grow your savings as much as you can. A great way to do this is by setting savings goals. For example, if you are putting aside £100 a month, you know that you will have £1,200 in a years time (providing you haven’t dipped into it!) plus any interest. Instead of settling there, why not set yourself the goal of having £1,500 instead. This way you will have to add to your savings at other times during the year, rather than relying on just your regular payments.
When to invest
Although you may be eager to start investing straight away, it’s more beneficial to have some savings behind you before you start. Most investment methods involve transaction fees so you will most likely get a better deal if you invest a higher amount. For example, the online broker I use charges £8 per transaction. This is the same whether you invest £500 or £5,000. As a percentage, £8 is 1.6% of £500 but only 0.16% of £5,000. Therefore, you are better off investing a higher amount as the transaction costs will be lower in comparison.
How it looks in practice
If we put the examples we have already discussed into an investment plan for your first year, here’s how it might look:
Monthly contributions = £100
Other amounts added during the year = £300
Interest = £20
Total saved in one year = £1,520
It’s only taken a year but you already have something to work with. You have even earned a small amount of interest too. Now you have some capital behind you, you can start looking at what kind of investment you would like to make. For example, at the end of your first year you may decide that you want to invest £1,000 in the stock market and keep the rest aside in your savings account.
Following the same plan, here’s how your finances would look after 3 years:
Amount invested in stock market = £3,000
Compounded stock market returns @ 7% = £215
Total left in savings account (inc interest @ 2%) = £1,591
Total in savings and investments after 3 years = £4,806
In 3 years you have gone from having nothing to almost £5,000 put aside. It may not be life changing but it’s a solid foundation to build on. If you continued in the same way this is how it would look after 10 years:
Amount invested in stock market = £10,000
Compounded stock market returns @ 7% = £3,816
Total left in savings account (inc interest @ 2%) = £6,814
Total in savings and investments after 10 years = £19,630
For the majority of people this should not be too difficult. When you break it down, you’re only having to put aside the equivalent of what it costs to buy a daily cup of coffee. If you are in a position to save more than that, let’s say £500 a month, you would have just shy of £100,000 in 10 years time – almost £30,000 of which would be interest!
Can you start investing with little money? Absolutely. That doesn’t mean you should go and buy £50 worth of shares. You begin investing the day you start saving. Set yourself a savings goal and once you reach it make your first investment. Whilst you are saving, use the time to learn more about what type of investment you want to make. You can also start looking at other economic factors, such as ensuring that inflation isn’t eroding all of your gains. Take it one step at a time and before long it will just come naturally.
Looking to invest in individual companies? Read my guide on how to value a stock.