Have You Got Twenty Quid?

One of the most common misconceptions about investing that I come across, is that you need to invest large amounts of money in order to make significant returns. Yet what most people don’t realise, is that you actually don’t need that much money to get started – and thus get started making profits and receiving income from dividends. A lot of people may wonder ‘Can I make money investing in stocks when I have hardly any money to begin with?’, something that I also wondered several years ago. Yet, I worked out that it was better to invest in stocks than sticking the little money I had in a crappy, low-interest bank account. I’ll give you some examples of how you too can start making meaningful returns by investing from just £20 per month – that’s probably less than the cost of your mobile phone contract.

Get Paid to Invest!

Depending upon your investing timeframe and your needs, you could actually turn your £20 monthly investment into £25 for free. Yes, free money! I am not joking, honestly! This is because if you invest into a pension, it is tax-deferred. For example, you put £20 into a SIPP on a monthly basis. HMRC will give you £5 for every £20 you put in. Even if you’re a child or not earning a wage at the moment, you can still get this tax top-up by the government. This is because you pay the tax when you start withdrawing the money upon retirement.

Maximising Your Money

For those not earning a wage at present, you can put up to £2,880 per year into a SIPP, but your total will be increased to £3,600. This is great for students, children, even housewives/househusbands who might not be earning a salary, but spouses/parents/grandparents could contribute towards the £2,880. Under the current pension rules, you might not even pay any tax when you withdraw the pension savings either. This is because you could withdraw up to the limit of your annual tax-free income allowance. At the moment, this is £10,600 and will probably continue to increase each year, at least in line with inflation.

Not Interested in Pensions Right Now?

Say you’re not interested in contributing to a pension. Maybe you’ve already got a pension scheme from work, or you used to have one, so you’ve got some money already waiting for you when you hit retirement age. Or maybe you want to begin investing by using your NISA allowance, because you want or need access to the money before you retire. This is also a viable option, since you can get started with a low amount and invest in funds via a broker that charges no commission on fund dealing. These brokers tend to charge a flat fee or a small % of your portfolio’s value for their services. Monevator has done extensive research on the cheapest brokers, so make sure you check out his comparison tables here, to see which broker is the cheapest for your situation.

Can I Make Money Investing in Stocks?

What Returns Can I Expect from the Stock Market?

Let’s say you have £20 a month to invest. If we just think about that, that’s £240 per year. Depending on what you invest in, there might not even be any charges, other  than a small fee (again, remember to check out Monevator’s comparison table). According to this report, average returns are about 7% per year. That’s based on the American stock market. The recent Barclays Equity Gilt Study states that after the effects of inflation are stripped out, you can expect a 5% return. This is obviously a lot better than cash returns, which are pretty measly right now. Of course this is not a guaranteed figure, but very little in life is (death and taxes spring to mind). However, investing over the long term always wins out against other types of savings, even if there are some downturns along the way – over time they even out.

So your £20 a month could be worth £256.80 after a year, not too shabby methinks. It’s a lot more than what you’d get if you just stuck it in a bank account. Moreover, just imagine you saved that £20 per month for a child from their birth, how much would it be worth by the time they’re 18? £8,731 that’s how much. A nice little cash pile to help them fund a gap year, buy their first car, or for them to hopefully put towards further investments by adding their own income. This just shows the power of tiny amounts – once you build them up, they really can start to accrue quite fast.

Investing for Children

Investing small amounts over a long time really adds up. It’s like the tale of the tortoise and the hare – the hare sprints off into the distance, whilst the tortoise walks along at a slow and steady pace. Meanwhile, the hare got tired really quickly, as he was racing so fast. He used up his energy too quickly, so he stopped to have a little rest. As he was resting, the tortoise walked right on past the hare at the same, steady pace and right through the finish line before the hare had a chance to catch him up!

Using stories like this one is a great way to teach and encourage children to save, but I think they should also have practical experience too.

How We Invest and Save for our Children

When our son was born, we decided to save and invest his child benefit money. It was about £82 per lunar month, so we decided to top it up to £90, and split it three ways. £30 would go into a Cash Junior NISA (aka a JISA), £30 would go into a Junior SIPP, and £30 would go into a Stocks & Shares Junior NISA. Since fund dealing is free on his Junior SIPP and Junior NISA accounts, we are using trackers (ultra low cost) to grow his wealth.

I like the feeling of being able to start something that will grow steadily over time, and be really useful for him in the future. He won’t even be able to access his SIPP (under current law) until he’s at least 57, so I hope that this fact will encourage him to think long-term about his finances. The JISA accounts will be the medium-term savings and investment vehicles. He will gain control of these at the age of 16 and full access at the age of 18. We also have a regular bank account for short-term savings. This bank account is the only one that he will be able to access before the age of 18, as he will be able to control it from the age of 12.

I’ve been thinking about these things a lot lately, as we will hopefully have more children, and thus do the same for them too. But more than that, our son is almost 2 years old, and learning and changing so fast. So we feel that it is important to get these habits sorted now both for ourselves as an example to him, and for him to also learn to save and invest wisely froma young age. I truly believe that children can understand way more than they are able to communicate back to us, and they especially respond to learning through play and practical experience.

To that end, we have started giving pocket money for little jobs our son does. He is really helpful and loves to sweep the kitchen using a dust pan and brush. He also loves to squash the milk cartons and put them in the bin. So we give him 10p for little job he does. Obviously, he doesn’t understand what money does yet, but he already knows and loves to put it in his piggy bank. This will be his little stash of money to spend however he wants.

When he is a bit older, we will add two more piggy banks – one for giving to charity and one for long-term savings. We will hopefully then be able to teach him about giving to those less fortunate than himself and to save for something bigger over the long-term. This is an idea that we were having already, but having been reading The Art of Simple on and off, we were convinced to do this,

How We Invest and Save for Ourselves

Along the same lines as our son, we invest and save for ourselves for short, medium, and long-term goals. We use p2p lending, dividend stocks, NS&I index-linked certificates, and cashback card and bank accounts to earn passive income. Our current focus is on building up our investments in dividend stocks, having used the other income streams more in the past.

We invest anything from £290 to £1000 per month, depending on what expenses we have coming up e.g. booking holidays or buying a replacement dishwasher like we did recently. We try to save about £820 per month, which goes into a variety of ‘savings pots’ e.g. car maintenance, house maintenance, home and travel insurances. They are basically all our annual expenses, divided by 12. This means that we are not caught short when the car insurance or tax is due. We try to put in a bit extra, so that any slightly larger than expected expenses will be covered easily.

Use Dividends to Pay for Expenses

This really takes the stress out of running a household, but I often caught myself thinking that the money could be better put to use if invested, rather than left earning hardly anything in bank accounts. We already have a 6 months’ emergency fund, which is a real comfort. So, we have decided to put the savings pots into stocks instead. This will be in addition to maintaining a month’s worth of expenses in our current accounts, so as to smooth out any bumps along the way.

We will then use our dividends and/or make occasional stock sales to pay for our annual expenses. Clearly, our trading fees will have an impact, but since we buy for £1.50 per stock, this keeps costs down. Selling costs £10, but with the dividends we will receive from the various stocks, these shoud more than cover the fees. We will pay attention to ex-div dates (as we already do) when buying and selling, so as to ensure the maximum return for the time invested.

So dear reader, what do you think? Would you begin investing if you only had £20 to spare per month? Would you put your savings pots into stocks? Have we gone crazy, or is this a good idea, given that we have backup money in the form of the emergency fund and the current account balances? Let me know, leave a comment below!

photo credit: bplanet/freedigitalphotos.net