Investing on a budget

No matter what you think or have been told, the door is open for literally every adult to invest. You don’t have to be wealthy and you don’t need loads of spare cash. 

And while investing is inherently risky – the amount you put in may be less than what you get out if the market or asset drops in value – it is also one of the most important ways to build wealth over time. 

How do I start investing? 

First, let’s take care of three common hesitations to investment:

But I haven’t done this before… If you have never invested before, or maybe you’re returning to it after some time off, don’t worry. You can start and restart at any time. The hardest part is getting started, and this is actually pretty easy. 

I don’t know much about investing… Investing for beginners is not a problem. You don’t need to know a lot about stock markets and such to get started. You will learn what you can at your own pace, even ramping up the sophistication of your investments as you go.

I’m on a budget… You can also invest a little bit at a time. Investing on a budget is possible. In fact, investing should be part of your budget. 

Here’s how to get started.

Budget for investing

You don't need a huge pot of money to start investing. You just need to figure out how much you can afford after all essential bills are paid. If you need to, create a budget and change your habits to increase the amount of money available for investments (see this and this article for saving ideas).

If you are already setting aside cash savings each month, have a reality check about what this is doing for your wealth goals. Perhaps you want to try investing in the same manner. 

Experts recommend setting up automatic deposits from your salary for investing every month. This way, you don’t need to think about it. 

Find a low cost way to invest

Investing used to be expensive, now it’s not.

For a bit of history, individual investors like you and me have almost always had the opportunity to buy individual stocks and Exchange traded funds (ETFs) on the stock market. We could build our portfolio and manage it ourselves. But it was expensive to make each trade and most people want professional investment advice and management. Investment managers provide that service, but they charge high fees for their time.

Fast forward to today. The market has opened up thanks to technology. Expensive and well-trained investment managers now compete for business with low-cost robo advisors and low-fee, customer-service friendly do-it-yourself investment platforms. Here’s a bit more about each:

Robo advisor - Robo advisors run off of algorithms developed in part by investment experts. They will put your money into a fund based on your risk profile. Because it’s automatic, robo advisors can replicate their advice to hundreds of thousands of people for a very low cost. 

So while investment managers may need you to invest thousands of pounds to make it worth their while, robo advisors are happy to take you as a client if you have only a few pounds. 

Low cost investing platforms - If you don’t want a robo advisor taking the wheel, you can take control and do it yourself. 

It used to be that if you wanted to do it yourself, you needed to know a lot about trading. Today’s platforms strive to make it easy, affordable and even fun to learn to invest along the way. Expect to find a “beginners guide to investing” on each platform.

There are plenty of options available to you. There are platforms that only need a few pounds to set up an account. There are trading platforms with low or no fees (every time you buy or sell a share, you typically pay a small fee). There are also trading platforms with social components, so you can follow other traders’ activities and even copy what they do.  

Here are a few Low fee Stock Trading platforms to consider if you live in the UK: 

  • AJ Bell
  • eToro 
  • FreeTrade 
  • Revolut 
  • Trading 212 
  • Vanguard 

What do I invest in?

There is so much you can invest in it’s hard to know where to get started. Here’s a list of options ranked by least control to most control over the specific investments.

Robo advisors will tend to pick investments for you largely based on your risk profile. There is little to no flexibility here. This is ideal for passive investors who do not have specific needs. 

Mutual Funds are managed by portfolio mangers. They pool investor funds to buy a collection of stocks, ETFs, bonds, and other securities. This is ideal for investors who don't want to pick their own stocks and don't want to spend money on a financial advisor. 

An ETF, or exchange traded fund, is best thought of as a basket of investments. There are tens of thousands of these ETFs or baskets, each with different parameters, such as industry, size, historic growth, geography, etc. For example “Fast growing green energy companies in Europe”, “Mid-size technology firms in India”, “All companies listed on the S&P 500 index”. When you buy a share of an ETF, you own a small portion of each stock/bond/commodity in that basket.

Stocks are for those who know exactly what companies they want. You can buy a stock, or a share, of Apple, Tesla, Netflix, and thousands of other companies that publicly trade on the market.

Alternatives like metals (Gold, silver, etc), property, crypto currencies and more are also available on many of the stock trading platforms listed above. These can often be purchased individually, through ETFs, and even some mutual funds.

Don’t forget about taxes

When you invest you can earn income in a few ways. 

  • Profit. When you sell an asset you get the current value, which can be worth more than you put in. This is your profit.
  • Dividends. Many companies give shareholders regular dividends payments. Dividend payments present a portion of the profits made by the company you invested in. This can be a few cents or pounds per share, and if you own many shares, this can be a substantial source of passive income

But beware! Most income from investments is subject to Income Tax. This includes money from share dividends. And if you sell investments and make a profit, that is also subject to Capital Gains Tax.

As of the 2020-21 tax year, up to £2,000 of dividend income is tax free. And you can make £12,300 in capital gains before you have to pay any tax.

If these tax penalties worry you, here are a couple of ways to invest tax efficiently:

  • Investment Savings Account (ISA) – When investing in your ISA, including a Stocks and Shares ISAs – you can invest up to £20,000 a year without paying tax on the investments. This means the investments can grow in value and any profit or income will not be taxed. 
  • Self-Invested Personal Pensions (SIPPs) – Like an ISA, by investing in your pension your money can grow in a tax-free environment. You can make pension contributions up to the annual allowance of £40,000 (or 100% of your income if lower).

Keep track of your finances in one place

It doesn’t matter if you are passively or actively investing, you will want to keep an eye on how much you are putting into your accounts and how your investments are performing. 

We know it’s a pain to log in to all your accounts and manually add up the numbers. That’s why at Money Dashboard we use open banking technology to show you the latest figures across your bank and investment accounts. 

This gives you a big-picture view of your finances and shows you if you’re meeting your investment goals. We also offer an increasing variety of connections to investment accounts and platforms such as Nutmeg, PensionBee, Revolut and Wealthify. 

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All content is for informational purposes only and is the opinion of the author. Nothing on this website should be interpreted as "advice". Money Dashboard Ltd make no representations as to the accuracy, completeness, suitability or validity of any information on this site and will not be liable for any errors or omissions or any damages arising from its display or use.

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