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Investing on a budget: a quick guide

When it comes to medium and long-term financial planning, there really is no option like investing. Now we would say that, but when you consider the alternatives, a diversified, global investment approach feels like a no brainer. 

Interest rates are low, property is prohibitively expensive and anyone without the money to gamble probably shouldn’t go anywhere near cryptocurrencies. Of course, with investing there is no guarantee you’ll make money and you may get back less than you put in, but we truly believe that for consistent growth over any significant period of time, smart investing is the winner. 

Little and often goes a long way

Contrary to popular belief, you don’t need to be wealthy to start investing. When you’re planning for the long-term, investing is really all about consistency. As a matter of fact, ‘little and often’ investing is actively encouraged – it’s known as pound cost averaging. 

You can read a full guide to pound cost averaging here, but it’s essentially the practice of drip-feeding funds into an investment account to smooth out any potential volatility in the markets. This is, in many ways, ideal for someone on a budget. Topping up what you can at the end of your paycheck isn’t just a plausible way to invest; it’s a smart one. 

By avoiding any semblance of ‘timing the market’, you’re far less likely to be buying at the ‘top of the market’. The most difficult decision you need to make here is how much and how often you invest, and this will be largely dictated by your financial situation.

Take advantage of compound interest

The real reason people on a budget should at least consider investing is compound interest. Put simply, this is the interest made by your interest. So, you invest £1,000 and, after six months, you have £1,200. That extra £200 of interest then begins to generate interest of its own. 

In theory, compound interest creates a snowball effect that is the key dynamic behind the idea of ‘putting your money to work.’ The reason this is pertinent to everyone is that, over a long enough timeline, anyone can significantly benefit from the effects of compound interest regardless of the size of the initial investment. Couple this with regular investing and the effects can be profound. 

How much should I invest?

This is where it gets tricky to give any broad recommendations; everyone’s financial situation is different and you know better than anyone how much you can spare each month. Though not essential, it can be smart to begin with a lump sum to get the ball rolling. Perhaps you’ve come into some inheritance or gotten an annual bonus at work – this is the ideal way to get started. 

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At Moneyfarm, for example, the minimum investment amount is £500 and we strongly recommend adding a regular direct debit on top of this. Because our portfolios are globally diversified, any less than this and you can end up spread quite thin. Ultimately, you should invest whatever you can at the start, then calculate a monthly top-up that fits with your financial situation. We’ll do the rest. 

Can I afford a wealth manager?

Another common misconception is that wealth managers are the reserve of the extremely wealthy. In 2021, this couldn’t be further from the truth. Digital products and investing informed by algorithms has driven the cost of active management down, something all would-be investors should be happy about. 

Let’s use Moneyfarm as an example again. We’ve made sure that our fees are transparent and straightforward, compiled into one percentage figure that you’ll pay on a monthly basis. You can check out the full pricing structure here and simulate how much you’ll pay in fees with our calculator. 

For that fee, your money is put to use by our team of highly experienced portfolio managers and, if you need any advice about what to do next, our investment consultancy team is on hand to provide it. We don’t think that anyone serious about their long-term finances should be priced out of having both. 

Before you start investing 

Before you do anything, it’s important that you’ve paid off any expensive debt and saved up enough for a rainy day. There’s risk attached to any investment and it’s better to have peace of mind and financial stability before you commit your cash. 

Also, it’s important to treat your investment portfolio as a long-term project rather than a savings account. The benefits of compound interest, for example, are hampered if you plan on accessing the funds regularly. To feel the full effects of your savings plan, try and see the investment in terms of years and decades, not months.

Investing is not and should not be something only very wealthy people can afford. Everyone can benefit from creating and sticking to a long-term financial plan that looks to beat inflation and provide returns above that of other vehicles like cash accounts. It’s never been easier to get started – find out about opening a portfolio of your own by clicking the button below.

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As with all investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest.