If you have £100 to spare each month, this is how you can invest that £100 per month and potentially turn it into an investment pot of almost £250k.
What is investing and why is it important?
Investing is putting your money into something that can grow over time and potentially provide income, e.g., shares, real estate, or a business.
Investing is important for several reasons:
- It can help you achieve your financial goals, such as buying a home, sending your children to university, and having a comfortable retirement.
- It generally beats inflation.
- Your money grows quicker and faster because of time and compound interest.
- It can generate passive income such as dividends from shares or rental income from property.
Types of Investments
There are various asset classes you can invest in:
- Stocks
- Bonds
- Property, residential and/or commercial
- Land: agricultural or developmental use
- Foreign exchange e.g., GBP / AUD, GBP / EUR, GBP / USD
- Cryptocurrencies e.g., Bitcoin, Ethereum
- Commodities e.g., Gold, silver, oil, wheat
How to Start Investing – Open a Brokerage Account
Choose a Broker
Start by doing an online search for ‘best brokers for beginners UK’.
There are several providers to choose from, for example, eToro, Fidelity, Vanguard, and Interactive Brokers.
When deciding on which provider to choose, consider:
- Investment selection: The range of shares and funds the provider offers, e.g., UK and international shares and funds or only funds.
- User experience: Is the trading platform user-friendly and easy to navigate?
- Educational materials: Does it have educational materials to help you get started investing?
- Fees: Low platform fees and low fees for trading
- Analytical tools: Does it provide tools, information, and research reports to help you analyse and determine the shares/funds you want to invest in?
- Ethical investing options: Does it provide ethical investment options e.g., Environmental, Social and Governance (ESG) is a set of standards measuring a company’s impact on the environment, how it treats its people and society at large and how it governs its business. Are there ESG-focused index funds to invest in for example?
Sign up and Open an Account
- Choose a broker: Find the online provider that offers all the features you want at an affordable price.
- Sign up and register an account: Go to the broker’s website. Decide on the account you want to open such as an ISA (or a LISA, depending on your age), a Self-Invested Personal Pension (SIPP) or a taxable Fund and Share account. ISAs and SIPPs are tax-advantaged accounts so you would be better off investing in them rather than a taxable Fund and Share account.
- Provide your details: Click on the ‘sign up’ or ‘register’ button. Provide your full name, email address, phone number and national insurance number.
- Other details: You may also be required to provide information on your finances, what investment experience you have (if any) and your risk appetite.
- Verification: You will need to verify your identity and eligibility to open an account and trade. You will need to provide photo ID e.g., your passport and evidence of where you live e.g., a utility bill dated in the previous 3 months.
- Fund the account: Choose to pay by debit card or bank transfer. For regular investments, you can set up a monthly direct debit.
- Start investing. Once your application has been approved and verified you can log into your account and start investing in any of the assets offered such as stocks, bonds, index funds etc.
- You don’t need lots of money to start investing. A myth is that you need lots of money to invest. You don’t. You can start with £100 a month, which can be a one-off deposit. Some brokers, such as Hargreaves Lansdown and AJ Bell, will even let you start investing for as little as £25 per month if you set up a direct debit with them.
Risks of Investing in the Stock Market
When investing, you must understand that there are risks and you must determine your risk appetite.
- Market conditions or the economy may change which could cause your investments to go down. For example, the COVID-19 pandemic caused the S&P 500 to lose 34% of its value in 2020 (Source: thestreet.com).
- There is a risk that your investments may not beat or even match the inflation rate. For example, in the UK, inflation is 6.7% (Source: Bank of England). If your investments return 5% then you are losing money as your investments are being eaten away by inflation.
- You may lose money on your investments because of fluctuations in the exchange rate between two currencies. For example, if you invest in a foreign stock that pays dividends in US dollars, but you live and work in the UK, then your investment may be at risk if there are unfavourable fluctuations in the exchange rate between USD and GBP.
- Your broker must provide a ‘Key Investor Information Document (KIID)’ for each fund you may wish to invest in. This information is required by law so that you can understand the nature and key risks you may face when investing in a particular fund. An example can be found here: KIID Vanguard FTSE Global All Cap Index Fund.
Invest in Low-Cost Index Funds
Beginners with £100 available to invest each month, should consider investing in low-cost index funds.
Index Fund Investing
Index fund investing is where the investor buys a variety of stocks or bonds in an index fund which tracks the performance of an index known as ‘the Benchmark Index’ such as FTSE 100 or S&P 500. As they are not actively managed, they are usually a very low-cost way to invest. Investors can choose a specific sector or geographic location to invest in.
Examples of Index funds:
Legal & General UK 100 Index Trust is passively managed as it tracks the performance of the FTSE 100 Index which is the 100 largest companies, by market capitalisation, listed on the London Stock Exchange. The fund size is £1,495m, ongoing charges are 0.48%. Dividends are paid twice a year, and the historical yield is 3.1%. The valuation point is daily at noon UK time. (Source: Legalandgeneral.com)
Fidelity Index World Fund is a global large-cap blend equity fund. It is passively managed as it tracks the performance of the MSCI World Index. The fund size is £5.43 billion, the number of holdings is 1511, and the net ongoing charge is 0.12%. Dividends are paid annually, and the historical yield is 1.61%. The valuation point is daily at noon UK time. (Source: fidelity.co.uk)
Why it is popular?
Index investing is great for beginners. It provides diversification in terms of the sectors that the companies operate in and potentially geographical diversity (depending on the index fund chosen). Another benefit is that, as it is passively managed, the costs of investing in these funds are low. It also lowers risk as by investing in an index fund, you are investing in a basket of companies rather than one individual one.
Long term investing – Time and Compound Interest
By investing over the long term, £100 invested each month into a low-cost index fund could provide you with a sizable pot if kept invested long term.
For example
Starting with zero, you invest £100 per month into a Global Index Fund in an ISA for 40 years @ 7% return.
After 40 years of investing, you could have a pot of £248,551.65.
Your contributions would have been only £48,000.
But the interest would be a whopping £200,551.65.
That is the magic of time and compound interest.
Investing with Only £100 Per Month Is Possible
You don’t need lots of money to start investing. As you can see from the example provided, a small amount of £100 per month invested into a low-cost index fund in an ISA, could grow into a very large pot of money over time due to the magic of compounding.
Investing in a low-cost index fund is the best way to start investing for beginners. You can do this even if you only have £100 per month to start with. So, start investing today!
Remember to always do your due diligence before making any investment decisions.
Thanks for reading!
If you have anything further to add or any questions, please do so in the Comments section below.
DISCLAIMER: Inquisitive Finance operates on principles of exchange of knowledge, ideas and opinions and learning in the community. Your decisions are entirely your own responsibility, and I am in no way responsible for your actions. I am not a financial advisor. Whilst I strive to provide accurate and up to date information, I make no warranties or representations as to the accuracy or completeness of this information. Use common sense, do due diligence and where necessary, use the services of a licensed financial advisor, before making any financial decision and/or transaction.
