As the author of a blog about investing and getting richer, I’m keenly aware that most people who read money blogs are in debt and trying to stop themselves getting poorer.
It’s no coincidence then that the most successful personal finance blogs are about struggles to get out of the red.
Obviously that’s bad news for me, since it means far fewer potential readers of my writing.
But it’s also bad news for these debt-ridden folk.
Investing is like any other positive habit – you need to start investing early and repeat it often to see the benefit. The longer you put it off, the harder it will be to grow a nest egg to replace your salary or enable you to retire early.
With this in mind, here are a few ideas for how cash-strapped surfers who stumble upon Monevator might start investing while funds are low.
(If you’re a debt or frugality-focused blogger or reader, please do pass on these ideas to others!)
Should you invest yet?
Before we start, I have to say that if you’ve got big debts on anything other than mortgage-level rates, you should get out of debt before you start putting money into the stock market.
It doesn’t make sense to be paying interest on a credit card of 20% when the average pre-tax return from shares over the long-term is 10%.
That said, I’ve even got a couple of ideas to help such people get acquainted with the ins and outs of investing before you’ve any real money. Read on!
1. Fund your investing first
Assuming you’ve simply got no money left at the end of the month – as opposed to debts to pay off – then your already in a better place than many. Congratulations!
Your next step should be to set up a direct debt to regularly take money out of your current account to a savings account earmarked for investment.
How much? I’d suggest 10% a month is a good target, but anything is better than nothing. (I’ve saved as much as 50% at times!)
Even 5% of your income might seem impossible at first, but commit to do it and you’ll find it’s possible.
If you have a pay raise or similar that you can redirect towards investing, it’s even simpler – redirect the whole increase to build up your investment funds.
2. Set up a paper portfolio
Before investing, you need to build up an emergency cash fund in case of any unexpected hard times. About three to six months income should do it.
In the meantime, discover how hard it is to beat the market picking stocks by setting up a demo portfolio using tools on sites like Yahoo.
Or simply run a pretend fund in a spreadsheet or on a notebook.
Set yourself a fantasy investment figure of say £100,000 and put the money into shares as you see fit. Don’t forget to take into account commission fees, and the spread on the shares, as well as any taxes in your territory (0.5% when you buy here in the UK).
Every so often, compare your portfolio to an index such as the FTSE 100.
You’ll have a lot of fun, but you’ll probably not beat it after costs – meaning you’ll see the benefits of an index tracker early without wasting any real money chasing shares.
3. Join (or set-up) an investment club
Investment clubs are monthly gatherings of a dozen or more people who pool their cash and their ideas to grow a communal share portfolio.
They’re often done for sociable fun as much as for profit. With a monthly subscription of say £25, you may find your drinks’ bill at the monthly gathering equals your investment outgoings!
However, they’re a great way to learn more about shares. UK investors can find out how to set one up from ProShares while US investors will find more information from the SEC here.
4. Start a modest monthly investment plan
In both the US and the UK there are so-called sharebuilder investment platforms that enable you to buy tiny amounts of shares cost effectively, provided you’re prepared to declare in advance what shares you want to buy and take the market price on the day your order is executed.
Another option is to put money into an investment trust, which here in the UK have savings plans that will accept as little as £50 a month in regular savings.
As I’ll show below how, even small regular additions can really add up over the long term.
If you can, choose an investment vehicle that’s sheltered from tax (here in the UK that means putting it into an ISA).
5. Open a spread betting account
Spread betting accounts enable you to bet on the direction of a share price.
Theoretically you could fund an account with just enough money to place a bet, open a position on a share price rising (or bet against a share you think is going to fall), and grow your investment pot from there.
In practice, the ups and downs will probably shake out any small positions sooner or later, and such platforms are also designed to encourage you to over-trade, which usually reduces returns.
I don’t think this is a good way to start investing. Spreadbetting can be used by experienced investors to avoid taxes, but in amateur hands it’s much more likely to produce losses. I’m including it only for the sake of completeness.
6. (Possibly) seize control of your pension
Even though you’re short of cash, if you’re middle class and middle-aged you might well have built up a decent pension pot.
If it’s a personal pension and you’re disappointed by the returns compared to the market (or the charges levied on it), you could consider transferring it to a Self Invested Personal Pension (SIPP) and being responsible for its fate yourself.
Definitely talk to an accountant or financial advisor (and probably your employer) before doing anything like this though, and don’t be tempted to gamble away your retirement income on risky stock picks until you’re sure of what you’re doing!
For most people a cost-effective index-tracking pension is going to deliver the best returns.
7. Consider (carefully!) releasing some equity
Perhaps you’re quite well off but you’ve always put your money into bricks and mortar?
If you’re property asset rich but cash poor, you could consider using some of the equity in your home to underwrite a debt that you put into the stock market.
Remember, despite the positive sounding name – ‘equity release’ – all you’re doing is taking on debt that will need to be repaid.
The only reason the debt is related to your property’s value is it gives the bank security that if you fail to repay what you owe it can seize your assets. It’s not free money!
That said, given all the spendthrifts who remortgaged to release cash for holidays and new cars throughout the property boom, remortgaging to get a modest £10,000 to kickstart an investment programme seems to me a fairly responsible activity.
Do read my series on borrowing to invest, however, as even cheap mortgage debt needs to be invested carefully and cost effectively if it’s to deliver a positive return over the long term.
And finally: Read, read, read
Perhaps the best thing you can do while you save up for your first investment is to learn more about investing.
There are loads of good books about investing (try Oblivious Investing) and you can also subscribe to Monevator and other blogs to learn more about how to invest while you build up your warchest.
Remember, compound interest, which is so deadly when you’re in debt, is on your side when you invest.
- An investment of just £50 a month started when you’re 30 could be worth £178,000 by the time you’re 65, assuming a 10% return.
- If you delay starting until you’re 40, your £50 a month plan will net you just £65,000.
Make it your mission to start investing ASAP!
Thank you for this “101” guide, it’s an excellent start for those of us who have never considered all these options (and traps) before. I look forward to further 🙂
I started investing in my undergrad even though I had student loans. That’s because I cared more about time in the market and my student loans weren’t/aren’t due yet. I focused on stock investing with no commissions. Super-cheap option for students, it was great!
Wonderful advice. Yes most Personal Finance blogs are persons outlining their debt free goals. I am in totally agreement with you that one should not invest until he/she pay off the debts that are lingering. Not only will this person being credit card debt free but he/she will have more money to also invest.