Saving money is a good habit to get into, we’ve all done it for something; a deposit on our first home, the holiday of our dreams or a home improvement project. Having the discipline to put a small amount of money aside each month is a good way to manage money, certainly if you can do it via a direct debit that turns it into a formal commitment. But there comes a time when you might want more of a return from that saving, or the reason you have been saving money has passed and now you can put that monthly amount to a more lucrative use?
Investing a regular amount of money is a great way to build a healthy fund for your retirement. Even if you are just investing a small amount each month, this can build steadily over time, particularly where you can commit to a long-term investment. And if you start young enough and invest wisely, this can build a very tidy sum for your golden years. With small investments, it is much more of a challenge to make good money quickly and therefore patience and some long-term vision might be required. But the small investor needs to look at a number of key things when trying to find the right investment vehicle:
What is my attitude to risk?
At the low end of the market, you have High Street savings accounts which are safe and secure and offer a steady interest rate, while at the other end there are stocks and shares where you can make money quickly but there is a risk of losing it.
At what age should I start saving?
Ideally, you want to do this as soon as possible and when you have a steady income and a small amount of surplus cash you can stick to each month. If your attitude to risk is fairly high then it is better to start investing at a young age when you at least have the time to recoup some losses over time, should the worst-case scenario occur, as opposed to investing later in life when you run the risk of losing your life’s savings and can’t get it back.
What am I investing for?
Small investments are very much about speculating to accumulate. So you can start by investing small amounts and over time this allows you to build up a fund where you can then diversify, and then invest in perhaps more lucrative schemes. The key is that most of this is a long-term investment, so if you want to build money and access it quickly, this definitely influences what investment vehicle is right for you.
Can I manage my money?
Even regular small investments are a commitment you need to be able to manage. So is your income stable? Can you pay off debts before you start? Such as credit card balances, overdrafts or loans. Having a clean financial slate makes it much easier to commit to investing that regular amount. If you're someone that regularly leans on money from the Bank of Mum and Dad, then you may not be ready to start investing.
You may have visions of investment as a glamorous and high adrenalin pastime, but the reality is that long-term investment is rather more mundane, and when you are investing smaller amounts, this is the game you are involved in. You are essentially selecting a suitable investment vehicle to keep an eye on and then choosing the right time to cash it in. You need to take good advice to avoid costly fees and charges that can eat into your investment and potentially set you back a couple of years, but most of all you need a calm attitude and focus, and even with small investments you can build some wealth in a very manageable way. So let’s look at the best ways to do it.
There are many different types of savings accounts but the common theme is that they are secure and low-risk and ideal if you are not saving for anything in particular, and don’t need access or a return on your investment any time soon. You can commit to paying in a regular amount and in some cases benefit from an agreed fixed rate of interest, some of which are more lucrative if you have an agreement to pay in for a fixed term, ie. 12 months. Even if you are investing during a period where interest rates are not too attractive, you are building up a secure and stable fund for when they ARE more attractive. Or you can build up a savings fund to enable you to switch to a different and more lucrative investment vehicle at a later stage.
High interest savings accounts are seeing a modest lift following the base interest rate rises seen over the last 12 months. Basic rate taxpayers also earn £1000 of savings interest tax-free, thanks to the new Personal Savings Allowance introduced in the UK in 2016. Tax is a significant factor with savings accounts and if you are saving enough money there are ways to find good returns and avoid paying too much tax.
You can earn up to £20,000 annually tax-free with an ISA, so a cash ISA is a good way to earn as much interest as you can, perhaps as an addition to a standard savings account. The annual cash limit for ISAs has grown from £3,000 to £20,000 over the last ten years and it remains one of the best ways to grow money quickly and securely, on a tax-free basis, with available interest rates slowly creeping up.
This might not immediately strike you as an investment vehicle, but smart management can reap some rewards. You can get interest rates of 5% on smaller balances, which change to 3% on balances up to £20,0001. But to get these deals you may have to switch providers. Introductory deals can be quite attractive and many banks provide incentives for swapping accounts, so as a supplement to a cash ISA a current account is a decent modest-level investment.
Easy Access accounts:
Not generally aimed at long-term investors, these are designed for people who want quick access to money, ie. they are saving to cover an emergency expense. Rates on easy access accounts are generally quite low as a result, and rates tend to be variable. So you can earn a decent interest and then when the rate goes lower, switch to a more favourable provider.
These are the opposite to easy access accounts in that, as the name suggests, you need to provide between 30 to 120 days’ notice to withdraw money. You will lose interest if you make an emergency withdrawal, and hence these are attractive for the long-term small investor. Notice accounts tend to offer variable rates rather than fixed, so again, it is worth keeping an eye on the market, as the difference between a 1% rate and 3% on a £3,000 investment over three years can be three times the interest return, ie. you could earn £90 in interest or £270.
Regular savings accounts:
Often requiring a regular set amount to be invested each month, ie. between £25 to £250, these are ideal for the committed small investor and you can choose the account deal that suits you best. Often interest rates can be higher if you commit to investing a set amount for a 12 months term, or any other agreed fixed term. Although, of course, you will be penalised for missing a payment.
Fixed rate bonds:
These are similar to a savings account in that you are offered a good interest rate for a fixed period, but usually you can’t add to your balance or access it for an agreed period. So this is more a vehicle for investing a lump sum, but this can be done every 12 months and as long as you don’t need access to it, you can earn good returns. This is of course still attractive to a small investor wanting to invest a regular amount, as you can build money monthly through a cash ISA, for example, and then on an annual basis, transfer some of that pot to a fixed rate bond. So you are spreading your investment and earning returns in two ways in tandem.
Stocks and shares
While savings accounts are safe and secure and allow you to invest manageable regular amounts, they are not always designed for long-term investment where you don’t need access to the money for some time. Investing in stocks and shares certainly requires a long-term commitment, ideally of at least five to ten years in order to ride out any short-term volatility that you are likely to encounter in these markets. Finding a vehicle that allows you to invest regular monthly amounts enables you to smooth out the ups and downs of the market. Investing, say, £50 per month in a single investment fund is a good way to monitor its growth for 12 months and then possibly diversify to two or more funds, depending on your returns and your attitude to risk.
If you are concerned about investing all of your money in the volatile platform that is the stock market, there are ways you can limit the risk and consolidate your investment. Companies such as Investec offer a fund which spreads risk by investing in other asset classes alongside shares, such as government bonds, gold and cash. This is called the Investec Cautious Managed Fund.
There are a number of other online platforms that may suit the smaller investor or at least one that is making that first tentative step into the fascinating world of stocks and shares. These allow you to invest regular monthly amounts into the stock market via shares, corporate bonds, commercial property or commodities. Finding a fund that spreads your money across a portfolio of different investments reduces the risk and brings a balance of different returns, which over a longer period should justify your initial and ongoing investment.
If you can commit to something as small as £50 per month, you can find an online tool that allows you to choose your investments or invest in a pre-selected investment portfolio. Cavendish, Chelsea, Fidelity and rPlan all offer this sort of investment2. With some of these, you can also split your investment to pay, for example, £25 per month to two separate funds.
Investing in individual company stocks is considered a little riskier and unpredictable, and therefore the domain of a more experienced investor rather than a rookie. But if you build up your investment portfolio steadily, in a couple of years you might find this venture more attractive and can afford to risk a portion of your monthly investment in this way. If you can afford to risk something like £100 per month, you could also look to invest in a FTSE100 tracker. These have been known to return something like 5% a year after inflation, so a long-term investment over, say, 30 years can bring returns of around £88,000 and brings much bigger returns the longer you commit to it3. This, of course, is something to consider if you are earning good money in a stable career from a relatively early age.
While the internet has changed the way people access their bank accounts and share investment funds, it has also opened up new ways to invest money wisely and in a moderate and affordable way. Previously, if a business wanted to fund a project or venture it would have a small band of people it could approach for investment, and they would be asking for big money. Now these businesses have instant access to millions of people and so only need to ask for small amounts of money. This, essentially, is the principle of crowdfunding.
Businesses that choose to go down this route of crowdfunding can target their investor market very easily online, and hence this can be a quick and easy method of growing a business. For the investor, it is a low-risk way to make money, but also a way to contribute to an initiative you believe in and help worthy businesses who might struggle to get the required finance through banks or other lenders. There is, however, no guarantee of a return in some cases.
There are types of crowdfunding, such as reward crowdfunding, where your investment is more of a gesture towards financing a project and you don’t expect a financial return, maybe just a product or tickets to an event that results from your investment. However, there are other forms of crowdfunding which are attractive to a serious small investor looking to make money through seeing a share price rise, receiving dividends or even making money from property.
This is a way in which a business will raise funds by asking people to invest a small amount of money in exchange for shares. In 2017, the UK invested £217.7 million in UK crowdfunding platforms4 such as Crowdcube, Seedrs, Funding Circle and Indiegogo. These platforms allow you to choose an individual business to invest in, so you are presented with all the information and expected returns and the terms and conditions of the investment. Usually, there is a minimum amount you can invest, but it can be as small as £10. Many crowdfunding platforms specialise in start-up businesses that are looking to grow quickly, and this is where you can make serious money. Fintech start-ups are very much an up and coming industry, while craft beer brewers BrewDog broke the UK crowdfunding record in 2015 when they raised £25 million.
Also known as debt crowdfunding, here the investor will lend money to a business or project looking to borrow capital to fund something. The loan is then paid back with interest over time. This tends to be less lucrative than equity crowdfunding as you don’t retain an interest in the business that could potentially be very successful. But again, it is low-risk, transparent and the expected returns laid out may look favourable to you.
Businesses like UOWN have helped develop property crowdfunding as one of the best small investment vehicles in the UK over the past few years. Like any investment, the more you put in the more you will get out, but property crowdfunding is also attractive to the small investor as you can make good returns while the risk is shared between all your crowdfunding partners in a property. You can make money by sharing the rental yield % of a property you have a share in, and this can be around 7-12% per annum. You can also earn money when that property is sold and you take a share in the capital growth it has accrued.
A new form of property crowdfunding is also being offered by companies such as UOWN, which enables people to invest in a property being built with a view to selling it. So you can become a property developer and an investor in one go. Property is not traditionally an investment vehicle for people with small investment pots, but crowdfunding has opened that possibility up. With UOWN you can invest whatever amount you want, from as little as £10, and you can spread that between different properties. You can also cash in your investment at any time by selling your shares to other crowdfunding investors. UOWN also deals in known markets where there is an established and stable property interest, so there is very little risk in this form of small investment.
How can you decide which small investment is for you?
Different small investment opportunities need to be assessed on the basis of:
- How quickly you want access to your money
- How quickly you want to grow your money
- What involvement you want in the process
- How stable you want the process to be
- Do you want a fixed return, a variable return or the risk of no return at all?
The least critical element in small investments, in some respects, is how much you can afford to commit to regular monthly payments. However much or little you can put away each month, combined with the factors outlined above, there will be the right small investment vehicle for you, and some professional advice will help you find it.
- www.moneysupermarket.com Best High Interest Savings Accounts Guide
- www.theGuardian.com Regular Investing - whether you have £10 or £500 there's a place for you
- www.theGuardian.com Regular Investing - whether you have £10 or £500 there's a place for you
- www.growthbusiness.co.uk Top 10 Crowdfunding Platforms For Businesses 2018