How to Invest Small Amounts of Money

The term ‘invest’ means different things to different people. Some might take a narrow definition of it as only relating to the investment in shares, whilst others take a broader definition that also extends to bank savings accounts.

Investing small amounts into bank savings accounts is generally easy. You can set up an instant access savings account usually with just an initial deposit of about 50 (equivalent to $100). Indeed, some Internet savings accounts will allow you to open an account with just 1. Having opened the account, you can then pay in whatever amounts you wish, either through Internet banking, Telephone banking, or in some cases via a branch. You can either set up a regular deposit via a standing order; i.e. pay 10 per month from my current account into my savings account. Investing small amounts over a long period can also deliver quite useful returns. Take this example: If I invested 10 per month into a savings account (paying 4% net), then after 18 years, the account balance would be over 3,000 ($6,000). If this investment was done on behalf of a child, it would give them a decent sum of money by their 18th birthday.

There are some savings accounts, however, that require larger balances. These typically include fixed rate bonds. They quite often have a minimum balance of 1,000 or higher. However, the good news is that you can often get nearly as good a rate via a high interest Internet savings account, and you have immediate access to your money, whereas savings bonds often say that you can’t withdraw the money for the fixed duration of the bond.

If we move on to investing in shares, it becomes a little more difficult for people who are looking to invest small amounts. This is because the value of each transaction will be impacted by the dealing fee that is charged each time that you buy or sell a share. It is certainly worth visiting a comparison site to find a good sharedealing service, as dealing fees can vary considerably. The lowest that I’m aware of is the Motley Fool Sharebuilder sharedealing service where you can buy shares for just 1.50 per transaction. This starts to make investing small amounts much more viable. Most investors in shares probably invest at least 1,000 ($2,000) per transaction, but with lower transaction costs, you could maybe invest 250 or even 100 and still get some decent value. Investing small amounts can also be a good way for beginners to test the waters of share ownership and benefit from learnings without risking too much money.

Another way to benefit from the stockmarket is via a tracker share scheme. In the UK, investors are allowed to invest in a tax free device called a Shares ISA. Investors can put up to 7,000 per year into the Shares ISA (or up to 4,000 if they have utilised their separate 3,000 Cash ISA allowance). And they can set up monthly payments into the Shares ISA. I invest 50 per month into mine, which is a fairly modest investment, but still should enable me to benefit from rises in the FTSE100 index, etc.

Certainly, people should be encouraged to invest their money, so that they can start to build for a secure financial future. And starting with small amounts is something that most of us have to do. Hopefully, we can then step up the size of our investments as we progress through our careers. It is also a good habit to encourage in our children. And with the benefit of compound interest, even small investments into a savings account can deliver a good return.