Can I afford to invest?
Our everyday living costs can eat into a lot of our monthly pay packet so it can seem difficult to save for the little luxuries in life, never mind putting some aside to invest. Even if you do find yourself with a little extra left over each month, you may assume that you need large sums of money to start investing.
However, this isn’t the case and you may already be investing each month by saving into a company pension plan. This is usually automatically taken from your pre-tax salary and invested into a fund, along with any contributions that your employer also makes to your pension.
This shows that investing is possible with smaller sums so how can you understand if you can afford to invest a little bit more?
To start with, you need to look carefully at your overall finances. Calculate how much you need each month and then see what’s left over. If you find that your money disappears, a spending tracking app can help you to see where it goes.
Next, it’s wise to build a savings account worth three to six months of your outgoings to have available in emergencies. It’s also inadvisable to invest if you have debts which charge high interest rates. Credit cards tend to be the most costly so it could be best to clear these first.
Once you have done this, you could consider investing something even if it’s a small amount.
One approach could be to invest a regular sum each month. Not only do you get into the ‘savings habit’ but it also helps to spread the risk. This is because you would be buying at various points in the ups and downs of an investment’s value, resulting in a more consistent average price.
To do this you could increase the amount that you contribute to your pension each month. Alternatively, you could look into opening a stocks and shares Isa and investing the amount there as everyone is different and no single approach suits all. It’s also important to remember that investments carry some risk and you may get back less that you initially invested.
Even if you can’t invest the same amount regularly, it’s still a good idea to try to invest earlier rather than later. This is due to the effect of compounding, where the returns on the original amount that you invest also earn returns too.
Apparently, Einstein called this the eighth wonder of the world and, over the long term, compounding can make a big difference to how much your savings are worth. So if you find yourself with a lump sum, you could consider investing to begin the compounding process.
Overall, don’t worry too much about the amount that you contribute but try to get into the ‘savings habit’ where you invest a regular amount or a lump sum when you can afford to do so. You can increase the amount you put away when you are able to but don’t be put off from getting started!