Investors with little spare cash can still build a meaningful nest egg, according to Clare Stinton at investment platform Hargreaves Lansdown, who says putting away £1 a day for 20 years could grow to as much as £15,000, while £100 a month over the same period could build a £52,000 pot at a 7 per cent annual return.
Stinton said too many people consider investing an activity for the rich, when in reality it is an effective way to get richer, adding that saving gets people started but investing can take them further.
Investors can begin with as little as £1 in a stocks and shares Isa, but the key is to start small, keep charges low and be prepared to leave the money to grow.
Build a buffer first
Before buying any shares, savers should build an emergency fund, since money that will soon be needed should never be invested, Stinton said.
She said it is always sensible to put some cash aside as a buffer for unexpected moments, such as replacing a broken boiler or covering the roof over your head if income suddenly changes, and that having this buffer makes dipping a toe into the stock market less daunting.
A rainy-day fund should be kept somewhere easily accessible, such as an instant access account or a cash Isa separate from a current account, with three to six months' expenses set aside. Setting up a monthly direct debit into this account on payday should help it build up before spare cash is directed into investments.
Starting with small sums
New micro-investing apps make it possible to invest even tiny amounts. Trading 212 allows investing from just £1, as do challenger banks Monzo and Zopa.
Moneybox goes further by letting users invest spare change left over from transactions. Micro-investing will not make anyone rich, but it helps people get started painlessly and add more once they see their investments paying off.
Smartphone investment apps make it easier to put money made or saved straight to work, such as paying proceeds from selling secondhand clothes on Vinted into an investment account, or transferring the cost of a coffee whenever one is made at home instead of bought. A direct debit set up on payday can also automatically move money into an investment account each month, prioritising investing before spending rather than putting everything in at once.
Choosing where to invest
Buying individual shares is risky for those with little money, so a low-cost fund that spreads investment across countries, sectors and assets is preferable.
Exchange-traded funds, or ETFs, offer a cheap way of tracking an entire stock market, and many investment companies allow contributions of as little as £1. The cheapest option for the global stock market is the Amundi Prime All Country World fund, which charges just 0.07 per cent a year and is diversified across thousands of companies.
Investors who prefer US firms can consider Vanguard's S&P 500 tracker, known as VUSA, which carries a similar charge, while Xtrackers offers a UK-focused ETF tracking the top 100 British firms with a 0.5 per cent annual charge. For those wanting exposure to corporate bonds as well as shares, Vanguard's LifeStrategy funds charge 0.2 per cent a year, with a higher bond allocation generally recommended for those who want to avoid volatility.
Keeping platform fees low
Alongside fund charges, investors need to weigh up platform fees. Trading 212 is a cheap option for beginners, offering shares, ETFs and investment trusts with no dealing or account fees.
InvestEngine offers only ETFs and is largely fee-free, though it requires a minimum of £100 to start. Fee-free platforms typically only allow ETF purchases, so investors wanting funds such as LifeStrategy may need a platform such as AJ Bell's Dodl, which charges 0.15 per cent with no trading fees.
Making the most of tax breaks
Putting investments inside a tax-efficient wrapper such as an Isa avoids paying tax on dividends or profits as the pot grows.
Using a pension or a Lifetime Isa, an account designed for first-time buyers and those saving for retirement, brings further benefits since the government adds extra money to boost the pot. Pension savers get tax relief at their marginal rate, while a Lifetime Isa comes with a 25 per cent government bonus on up to £4,000 a year. However, the money in a Lifetime Isa can generally only be accessed after the age of 60 or used to buy a first home worth under £450,000.
Staying invested for the long term
Investing works best over the long term, and even budget-conscious investors should avoid withdrawing money for at least five years, giving it time to grow and to smooth out ups and downs in the stock market.
Watching a portfolio grow over time may encourage investors to put in a little more each month as their finances improve, making the first small investments made during leaner times feel worthwhile.
