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How investing small amounts of money can lead to riches

A friend of mine dumps his small change into a jar at the end of every day. At the end of 2019, he counted it up and had close to £750.

That’s only around £2 per day, but do it for 10 years and it can add up to a nice sum. Over the long term, the UK stock market has returned around 4.9% above inflation per year on average. And that could turn that £2-ish daily amount into around £10,500 in 10 years.

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Stash away those coins every day for 20 years, and you could end up with almost £32,000. And doing it for 30 years could earn you a pot of around £73,500. Just from a couple of pounds per day.

A bit more

This really shows the power of saving and investing small amounts of money regularly. But if you can accumulate that amount of money from just £2 or so a day, what can you achieve by investing a little more?

How about adding a £10 note to your savings pile every weekend? People easily spend that on a trip to town and a couple of coffees. Or a few beers in a pub (and maybe only one or two if you’re in London). It’s not a great sacrifice to forego something like that once a week to boost your investments, surely.

That tenner would add an extra £520 to the pot every year, for a total of £1,270. Invested the same way, you could end up with around £18,200 in a decade, £54,000 in 20 years, and £124,000 after 30 years.

Just think, if you’d started on this route 30 years ago, you could be a lot closer to a comfortable retirement today. And we’re still talking about investing only a little over £100 per month.

What to do?

These figures are all well and good, but how do you actually go about it?

For me, it would have to be a Stocks and Shares ISA, because that would make all of the proceeds tax-free. With such relatively small annual amounts, you might not be too worried about tax. We have a capital gains allowance each year, and one year’s profit from this strategy won’t come close to that.

But after 30 years, when you come to start drawing on a pot that could be well in excess of £120,000, wouldn’t you prefer not to have to think about tax? The beauty of an ISA is that it doesn’t matter how long you invest and how much you manage to accumulate. You’ll never have to pay a penny in tax when you take your money out, however much you have.

Regular

Most ISA providers these days will allow you to transfer money in regularly, in small amounts. It can be as little as £20 per month, so it’s easy to do.

But what investments should you buy? If you’re starting out and don’t fancy picking your own shares, I’d go for a tracker fund. And right now, I’d be tempted to split the cash 50/50 between a FTSE 100 tracker and a FTSE 250 tracker. But you could get a significantly better return by picking your own individual stocks.

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Views expressed 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.