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Worried about the State Pension? I’d start investing with just £25 a month

The State Pension offers an income of just £168.60 per week. If you’re worried about how you’ll survive on this amount when you retire, then it’s time to start investing.

On Saturday, I explained how investing just £4 per week into the stock market could give you a £10k lump sum in 20 years. As promised, today I’m going to look at how you can start investing with as little as £25 per month.

The problem

In my experience, most online brokers charge about £10 per transaction for purchasing shares. That’s okay for larger purchases, but if you want to drip-feed £50 into a low cost Stocks and Shares ISA each month, a £10 fee would swallow up more than 20% of your cash, leaving you just £40 to invest.

That’s clearly not acceptable — it would mean that the shares you bought would have to rise by about 25% just for you to breakeven.

The solution

Luckily, there’s another way. Here, I’ll show how you can invest as little as £25 in the stock market each month, without paying too much in fees.

Get started with £25 a month

If you can spare £25 each month for your investments, then you’re good to go. I’d start by opening a Stocks and Shares ISA to ensure that any future income and capital gains are tax free.

The next step I’d take would be to choose a cheap fund in which to invest my cash. I’d choose a FTSE 100 tracker fund. These popular funds mirror the performance of the 100 largest companies on the UK stock market.

The FTSE 100 provides a dividend yield of 4.3% per year at the moment and fees on these funds are usually very low. I’d expect to pay no more than 0.5% each year.

If you’d like something different, then other options include European or Global index funds and ethical tracker funds. The important thing is to make sure that costs are low — you don’t want your money eaten up by fees. Once you’ve chosen your fund, set up a direct debit payment to take the £25 (or more) from your account each month.

Got £50? You could buy shares

If you can stretch to at least £50 per month, you might be able to start investing directly in shares. To do this, you’ll need to provide the regular investing service provided by most online brokers. The way this works is that small orders from lots of investors are grouped together and executed once each month. Your dealing fee will be much lower than usual, perhaps just £1.

Most brokers have a minimum purchase of £25, so with £50 you could opt to buy two shares for three months, and then switch your purchase to another pair of shares. If you continued this process, you could eventually build up a portfolio of 15-20 companies.

Don’t forget

To be honest, I’d stick to funds if I was investing less than £100 per month. You’ll immediately get the benefit of a diversified portfolio, rather than concentrating your investments in just a few stocks.

Whatever you choose, it’s essential to make a long-term commitment. If you’re not happy holding your investments for at least five years, I’d keep the money in cash.

In my next piece, I’ll pick my top FTSE 100 stocks for a starter portfolio.

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Roland Head 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.