Is it worth investing with little money?

If you are someone who is interested in investing but feels as though they don't have enough money to do so or worries that investing only a very small amount is pointless then this post is for you!

The quick answer to the question at the start of this post is YES! It is absolutely worth investing if you have any spare money left over once your essentials are covered. However, of course it is not as simple as a yes or no - as with everything in life. Whether you wish to invest or not is a personal and individual decision and is dependant on a few factors.

Accessible money:

I try to look at investments as something I do when I have any spare money. It is often better for long term returns and growth to place the money into index funds etc than to leave it in cash, waste it or keep it in a low interest savings account which often loses money over time as inflation increases. This being said.... if you don't have too much spare cash then I wouldn't suggest putting it all into investments.. let me explain. If you have only have $100 spare a month after you pay for all your necessities I wouldn't be investing this I would instead keep this in an accessible account for emergencies and unforeseen circumstances like needing to buy a new oven if yours breaks or whatever it may be. It's always a sensible and safe idea to have accessible money should you need it. A lot of people would say its best to have 6-8 months worth of accessible money. So if you need $500 a month for expenses then you should have 6 times this at least in accessible money should you find yourself without a job or need emergency money.

When it comes to investments, day trading excluded, you will probably want to leave the money to build over time. If you don't have any money in an 'emergency fund' but have put all your spare money into investments and suddenly you need $1000 but it's all tied up and none of it is accessible then there may be an issue. When you try to withdraw money from investments, there's often withdrawal fees but also if you need the money urgently and you are forced to sell stocks on a particular day you may end up selling your stocks for less than your purchased them for so you actually end up losing money. You could also not be able to withdraw the money quick enough. So basically investing is beneficial but you do need to make sure you have some accessible money too.

Scenario 1:

Let's say Mr. Invest earns $2500 a month and after all necessities are paid for he is left with $700. Usually he spends $150 of this on going out and then leaves the remainder in his everyday bank account. That money is not really doing anything good for him. It's not gaining value. If he hasn't already saved a decent emergency fund as I mentioned earlier, he should prioritise saving towards that first and leaving it in an accessible account. However if he already has a good amount of savings, what he could decide to do is to keep the $150 for his lifestyle costs but then invest the remainder of the $700. He could start putting the $550 into an index fund or whatever he decided.

What I am trying to get at is that you don't need to have a spare $6000 a month to be able to invest or for it to be a beneficial thing. You may think that putting only $100 a month into an investment is pointless but due to compound invest it is not.

Be aware that different investing platforms will have different minimum investment amounts. If you use Vanguard in the UK for example as I do, you can do a single investment of minimum £500 or monthly instalments of minimum amount £100. And of course, you can combine the two. You can for example put £500 into an index fund and then not add anymore until you are financially able to do so or you could invest the initial £500 and then set it up so that every month £100 goes into the investment. On some apps on the phone you can invest in stocks with as little as £5 so theres options.

Compound interest:

Due to compound interest, it's worth investing even a small amount. Compound interest is quite a confusing concept to explain actually but when you save money you earn interest on the money you're saving but you also earn interest on the interest. So for example, in year 2 of saving you will have earn't interest on the interest of year 1. It's basically interest earning interest which leads to exponential growth over time.

Example 1:

Let's say you only had a spare $200 to invest as a one off.

If you earn, for arguments sake, 5% interest per year and you've invested $200 then at the end of the first year you'd have $210 as thats the $200 plus the interest (5% of $200). Then the second year you earn 5% interest on $210 which give $220.50. The third year you are earning 5% on $220.50 which gives you $231.52 and so on. This means you'd have put in $200 only over the 3 years but made $20.50 in interest.

Example 2:

If you had $200 to put into an investment but also had $200 to invest every single month and had a 5% interest rate then you would have $7,982.96 at the end of the 3 years. So after 3 years of investing $200 a month you'd have put in $7,400 but would have earn't interest which compounded so you'd have earn't a further $582.96. Over time this just increases exponentially.

In a normal savings account you'd be lucky to get a 2% interest rate, well I can only talk for the UK, which is much lower than the 7% through the S&P 500.

I hope this blog post helps you see that you don't need to be rich to begin investing!

Thank you for reading,

Hayley