When money is tight, investing in shares may seem like an unnecessary risk. Yet history suggests that cash can grow much faster in investments than it typically does when left in a savings account.
Investing £100 a month for 20 years at an annual return of 7 per cent could produce a pot worth around £52,000. Even putting away just £1 a day over the same period could build savings of as much as £15,000.
You do not need a large sum to begin. It is possible to start investing with as little as £1 through a stocks and shares Isa.
Clare Stinton, of investment platform Hargreaves Lansdown, says: ‘Too many people consider investing an activity for the rich. In reality it’s an effective way to get richer. Saving gets you started, but investing can take you further.’
That may sound encouraging, but finding spare money can be difficult when household budgets are already stretched. The most practical approach is to begin with small sums, keep investment charges under control and give your money time to grow.
Clare Stinton at investment platform Hargreaves Lansdown says it’s always sensible to put some cash aside as a buffer for unexpected moments
Build a buffer zone
Money you expect to need soon should not be invested. Before you start buying shares, make sure you have built up an emergency fund to cover unexpected costs.
Ms Stinton says: ‘It’s always sensible to put some cash aside as a buffer for unexpected moments, whether to replace a broken boiler or keep the roof over your head if you have a sudden change in income, and it’ll make dipping your toe into the stock market less daunting.’
Keep your rainy-day savings somewhere easy to access, such as an instant-access account or a cash Isa held separately from your current account. As a general aim, try to build a fund covering three to six months of expenses.
A monthly direct debit set up for payday can help you build this buffer gradually. Once your emergency savings are in place, you can begin investing any money you can afford to leave untouched.
Start really small
New micro-investing apps have also made it easier to put away very small amounts. Trading 212 lets users invest from £1, while challenger banks Monzo and Zopa offer the same starting point.
Moneybox goes a step further by allowing users to invest spare change generated by everyday transactions. Micro-investing is unlikely to make you wealthy on its own, but it can provide a simple, low-pressure way to get started—and gradually increase your contributions as your investments grow.
Investment apps on your smartphone mean it is now even easier to invest money made or saved. For example, you could pay any money from selling secondhand clothing on Vinted straight into your investment account, or you could transfer the cost of a cup of coffee every time you have one at home instead.
This will help your investment pot grow without affecting your ability to pay the bills.
Use direct debits
You can use a direct debit to automatically pay money into your investment account each month – many people do this on payday. This means you prioritise investing before spending, and aren’t putting all your money in at once.
What to invest in
When you have little money, buying individual shares is risky. So choose a low-cost fund that spreads your investment across countries, sectors and assets.
Banks such as Monzo and Zopa, as well as trading groups such as Trading212, allow you to invest from just £1
Consider investing in so-called exchange-traded funds (ETFs) which are a cheap way of tracking an entire stock market. Many investment companies allow you to put as little as £1 into these.
Cheapest for the global stock market is the Amundi Prime All Country World, with an annual charge of just 0.07 per cent. It is diversified across thousands of companies. If you prefer US firms, Vanguard’s S&P 500 tracker, known as VUSA, has a similar charge. For a UK fund, Xtrackers has an ETF charging 0.5 per cent a year that tracks the top 100 British firms.
If you want a fund that includes corporate bonds, not just shares, try Vanguard’s LifeStrategy funds (0.2 per cent a year charge). For those who like to avoid volatility, a higher percentage of bonds is usually recommended.
Pick a cheap platform
As well as fund fees, you need to consider investment platform fees. Cheap options for beginners include Trading 212, which offers investing in shares, ETFs and investment trusts, with no dealing or account fees.
InvestEngine only offers ETFs and is mainly fee-free but you need to start with £100.
In many cases you can only buy ETFs on fee-free platforms. If you want to put your money into funds such as LifeStrategy, apps such as AJ Bell’s Dodl have a 0.15 per cent platform fee and no trading fees.
> Read our full round-up of the best and cheapest investment platforms
Save on tax
To ensure you don’t pay tax on dividends or profits on your investments as your pot grows, put them in a tax-efficient wrapper such as an Isa.
If you use a pension or Lifetime Isa (an account designed for first-time buyers and those saving for retirement), you’ll do even better from investing as the government will add in extra money to help your pot grow. In the case of a pension, you’ll get tax relief at your marginal rate and a Lifetime Isa comes with a 25 per cent government bonus on up to £4,000 a year. There are restrictions on this though – you’ll only be able to use the money after the age of 60 or to pay for a first home worth under £450,000.
Leave it be
Investing is for the long term. Even if you are on a budget, you shouldn’t plan to withdraw your money for at least five years. That gives it time to grow, to smooth out any ups and downs in the stock market and to ensure you’ve built a meaningful pot.
Seeing your portfolio grow over time might spur you on to invest a little more each month as your finances are on a firmer footing, making those first small investments you made when you were struggling to put money away feel all the more worthwhile.
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