Are you wanting to invest for the future but convinced that you don’t have sufficient cash to get started? Don’t worry — you’re not alone.
One of the most misunderstood things about growing your wealth via the stock market is that you already need to have a lot of money to make more of it.
So long as you’re prepared to make a few sacrifices and choose the most cost-effective approach, this simply isn’t true.
Save where you can
Notice that the title of this article refers to being ‘broke’. By this, I’m referring to having no money left over at the end of the month after taking into account discretionary spending. Quite rightly, those in more difficult situations (those carrying debt, for example) will have different priorities.
For everyone else, however, this is where you start. Make a note of all your spending over a single month — every last penny — and work out what you can cut out. This isn’t about adopting a monk-like existence, it’s about seeing what things you can genuinely live without.
An example? Let’s say you buy coffee every weekday morning at £2.50 a cup. That’s £55 a month based on 22 days of caffeine fixes. If you can drop this habit, your wealth-generating journey is ready to begin.
Having cut back, it’s time to put any cash you have managed to save to work in the stock market (preferably within a tax wrapper such as a Stocks and Shares ISA).
Since your contributions are likely to be small to begin with, it’s likely that investing in individual company stocks will be far too risky and expensive. They’ll be plenty of time for that as your confidence and/or the amount you’re able to save every month increases.
Investing in a fund run by a professional manager is an option, but study after study has shown that the vast majority of these underperform the market after fees have been deducted.
For someone just finding their feet, I think a global exchange-traded fund or tracker is one of the best options available. You can find more details here.
Smooth out the bumps
Those only able to invest a little a month have one advantage over those with a bigger amount to invest. Throwing all (or significant lumps) of your cash into equities in one go could be very unpleasant — at least in the short term — if markets suddenly tank.
Investing on a regular basis tends to be less risky because your money will buy more shares when prices are low and less when prices are high. This method — known in the business as ‘pound cost averaging’ — is perfect for those who don’t have time to monitor their investments since it helps to smooth out returns.
There’s another positive to regular investing. The commissions charged by platforms are low (as little as £1 per trade), at least relative to the usual costs of buying stock. The reason for this is that orders are bundled together and executed once a month. Since we’re not advocates of attempting to time the market here at the Fool anyway, that’s alright by us.
Remember that £55 a month saving? Over 30 years, this would grow to a little over £62,000 (excluding fees), assuming an annual return of 7%. That’s surely worth sacrificing a few coffees for.
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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.