Are you worried about investing your cash in the stock market? Do you feel you should have a long-term savings plan to help provide for your children or grandchildren?
If the answer to these question is yes, then you’re in good company.
40% of mothers who took part in a recent Mumsnet survey, commissioned by Legal & General Investment Management, said that they want to invest their money, but can’t. Some said they didn’t have enough spare cash, while some said that they just didn’t know how to get started.
I think that one reason for this could be that stock market investing has a bad reputation. Many people I speak to believe that it’s difficult and expensive.
The good news is that this doesn’t need to be true. Today, I want to explain how you could get started with stock market investing. I’ll also show how you could turn £10 per month into a £5,000 nest egg.
In the Mumsnet survey I mentioned at the start of this piece, 37% of those questioned said they’d consider investing “if they could grow their money over the long term.”
The good news is that over long periods, the stock market has historically delivered much higher returns than cash savings. According to figures prepared by Barclays, the average annual return from the UK stock market from 1899 to 2016 was 8.9%. For cash, the equivalent figure was just 4.7%.
Of course, over short periods, the stock market can go up and down quite unpredictably. But it seems that over the long term, stocks generally go up.
Making your money work for you
The second ‘secret’ I want to share with you is called compounding. What this means is doing nothing and letting your money work hard for you.
For example, if you received interest of 4% on an investment of £100, you’d have £104 after one year. If you left this for a second year, you’d end up with £108.16. This is because you’d receive interest on the full £104, not just your original £100.
If you continued to leave the money untouched, then after 10 years you would have received £48 of interest. Your initial investment of £100 would now be earning nearly 6% per year for you. This is the power of compounding.
The magic of regular savings
Compounding is a wonderful way to make money. But the effects are even better if you can add money regularly to your savings.
My sums show that if you saved £10 per month into a tax-free Stocks & Shares ISA account for 10 years at a return of 7%, then you’d end up with £1,720. If you carried on for 20 years, you’d have £5,104.
How can I do this?
Hold on a moment. You don’t know anything about the stock market or how to buy shares? How can you hope to achieve the kind of results I’m talking about?
Most top investors agree that the safest and most reliable way to invest in the stock market is to put your money in a tracker fund. This is a low-cost fund that simply follows the movements of the wider stock market.
In the UK, the most popular choice is a FTSE 100 tracker fund, which follows the largest 100 companies on the London Stock Exchange. Many of these companies pay generous ‘dividend’ or interest payments, providing regular annual returns.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.