Small Investments One Can Make in the UK
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Why does one need to invest?
People invest for varying reasons including:
- Financial Security – people want to protect themselves against any financial hardship that may arise. Unforeseen events such as a health crisis or a natural disaster are dealt with causing financial distress.
- Financial Independence – this ensures that you have enough money to pay for your needs and wants for the rest of your life without having to rely on others or working to old age.
- Build your wealth – for one to build wealth, they save then invest their savings over time. The proceeds from the investments can be reinvested into the same instrument or something else. These are small steps towards building wealth.
- Attain your goals – if one has a dream to buy a house or make a trip to their favourite destination, the goal set here would be the motivation to save and invest money. The goals could be short, medium or long term goals. Investing would make the process of attaining the goals much shorter.
Almost two thirds of the population in the UK is not investing. There are many reasons for this reluctance, but the main one is the belief that one requires a large amount of money to get started. This is totally false. Actually, investing small amounts of money regularly and progressively is better than investing a large lump sum in one go.
How to build wealth with small investments in a manageable way:
- Use a robo-advisor – these were launched about 10 years ago, making investing as simple and as accessible as possible. Robo-advisors determine your goal and risk tolerance by asking you a few questions then investing your money in a highly diversified low-cost portfolio of stocks and bonds. The portfolio is continually rebalanced and optimized for tax using algorithms.
- Start investing a little money in the stock market – the ability to invest in fractional/partial shares has made it possible for a small investor to diversify their portfolio while saving.
- Try the real estate market – with real estate crowdfunding it is possible to own fractional shares of large commercial properties without having to own a building.
- High yield savings accounts – typically opened through an online bank, tend to pay higher interest on average than standard savings accounts while still giving customers regular access to their money.
- Employer’s retirement plan – plan to invest just 10% of your salary into the employer plan. This can be increased gradually each year. The amount is made even smaller by the tax deduction one will get for the contribution. One can choose to invest in a target-date retirement plan. As the target dates get closer, the fund’s allocation will shift away from riskier assets to account for a shorter investment horizon.
- Certificates of Deposit (CDs) – one can purchase a CD for varying time periods such as six months, 1 year, 5 years but you cannot access the money before the CD matures without paying a penalty.
- Mutual Funds – this investment allows one to invest in a portfolio of stocks and bonds in a single transaction. Automatic investing is a common feature with mutual funds and ETF accounts. An automatic arrangement is particularly convenient if done through payroll savings.
- ETFs – Exchange traded funds are similar to mutual funds but are traded as a stock would, throughout the day, offering a significant liquidity advantage over mutual funds. ETFs can be purchased at the cost of one share plus any fees or commissions associated with the purchase.
- Stocks and Shares Individual Savings Account – once money is invested in an ISA, it is protected to stop the tax office from taking a share, in that one does not pay UK tax on any profits made.
- Peer-to-peer lending – these are loans where individuals directly lend to other people or businesses, without using a bank as an intermediary. These lending firms typically offer a 6% return on investment. This type of investment might provide a lower risk in times of economic growth.