How to Invest Your First £100

  • Investing, rather than speculating, is a long-term process (10+ years)
  • A long-term approach can help ride out dips in the market, and benefit from compounding
  • Index funds allow you to invest in the entire stock market, which has traditionally increased in value more often than it has decreased
  • Low cost index funds are recommended to casual investors by investing titan Warren Buffet

An explosion in apps and trading platforms has helped provide easy access to investing — allowing you to prepare for a brighter financial future, no matter your budget.

My late grandad had a saying: “Look after the pennies, and the pounds will look after themselves.”

And when I was growing up, he took a different approach to pocket money.

Instead of handing out cash for sweets, he saved £2 a week in a Cash ISA from the day I was born until I was 18.

On the day of my 18th birthday, he presented me with an envelope showing what the balance was — the £1,872 he’d invested, a surprisingly high amount in itself considering it was just £2 per week, was now worth over £3,000 thanks to interest.

This gave me a huge head start as I moved away from home and started my adult life.

It also taught me a valuable lesson: putting a little amount away can make a huge difference for your financial future.

You don’t need to be a mega millionaire to benefit from compound interest — and you don’t need to sacrifice the little pleasures in life, a takeaway coffee here or a pint there, to save for a rainy day.

Yet there seems to be something putting Brits off investing.

Government data shows just 31% of us had an ISA in 2021-22. Only 8% own shares.

In contrast, Gallup research from the US reveals that a staggering 61% held stock as of last year.

It’s difficult to know why there’s such a disparity.

Some may feel it’s just too technical to get their head around, or perhaps too risky. And given the recent cost-of-living crisis, it’s fair to assume many of us have other pressing financial matters on our minds.

Today, I want to simplify the investing process for you — and help you realise that the majority of people can put small amounts away for later life.

I’ll talk about how you could invest your first £100, with small ongoing contributions after that.

The beauty of this guide is that it’ll work just as well whether you have £20 or £50 to spare, or have the means to set aside a little more.

Investing vs speculating

The first thing you need to understand is the two key differences between investing and speculating: timelines and risk.

Investors tend to adopt a long-term view with the investments they hold. And while there’s always risk when it comes to the stock market, the objective here is to secure gradual gains over time.

Meanwhile, speculators are constantly on the lookout for huge gains — and quickly. But with the prospect of eye-wateringly high returns comes a lot of risk, and there’s always a danger that an asset could see its value fall substantially.

A good example of a speculative asset are cryptocurrencies like Bitcoin. While this digital asset did see its price surge by 146% in 2023, this was on the back of a bruising 62% fall in 2022.

The Financial Conduct Authority estimates that almost five million Brits have now dabbled in crypto — with many losing a substantial amount of money.

Other recent examples include products like Pokémon cards and NFTs, with the majority of purchasers simply hoping to make a quick buck — and the silent majority failed to do so.

Even stock trading can be speculative, just look at the Gamestop saga, or any average Joe on the street picking up the next big oil stock “that will 10x in price if they find oil!”

Narrator: They never find oil.

In contrast, many long-term investors wouldn’t feel the real world impact of a portfolio dropping by 50% in value because their investment funds are entirely separate from their living funds — and they know their funds will be in the market for another ten, twenty, or even thirty-plus years.

Yes, every investment has risk.

But long-term investing in stocks and shares has traditionally been on the safer side of the risk spectrum.

Speculating is a much bigger gamble — and often one with no evidence that it will actually pay off for the majority of people.

The power of compounding

As we saw with my grandad, modest contributions have the potential to grow over time — and that’s thanks to the power of compounding.

The average return of the S&P 500 has been around 10% per year since the 1950s.

Let’s imagine that you invest £100 and it grows by 10% in the first year. That’ll leave you with a balance of £110, and gains of £10.

If that performance was to be repeated in year two, this time you’d receive £11 — an extra pound because you’ve made returns on your returns. Year three would bring £12.10, year four £13.31, and year five £14.46.

As you can see, that initial £100 can do some heavy lifting. Left untouched with returns of 10% a year, it would be worth £270 after 10 years — and £732 after 20 years.

This brings us neatly to the importance of leaving your investment alone (if you can help it).

Regular withdrawals will deny your savings a chance to grow.

So — how would that first £100 grow with returns of 10% a year once regular monthly contributions are thrown into the mix? The figures will blow your socks off:

Monthly
contribution
10 years15 years20 years25 years
£5£1,303£2,535£4,561£7,895
£10£2,336£4,624£8,389£14,585
£20£4,401£8,803£16,046£27,964
£50£10,598£21,341£39,017£68,100
£100£20,925£42,237£77,302£134,995

As you can see, these are some pretty eye-popping numbers — and it just shows what’s possible if you’re able to set a little bit aside each month.

And by adopting a long-term horizon, crashes in the stock market become less of a concern.

Taking some time to crunch the numbers, pore over your budget, and allocate some money to investing every month can potentially prove hugely rewarding in the years to come.

It’s important to be realistic about what is affordable for you, regard it as untouchable, and make sure it’s one of the first things that flies out of your bank account after payday.

Because investments are intended to be left to grow for years on end, you might also want to separately save some cash every month that can be dipped into whenever there’s an emergency. This is known as an emergency fund.

So… what are the types of investments on offer, and how do you get started?

Shares and index funds, explained

Shares in individual companies, as well as index funds, are two easy ways of gaining exposure to the stock market.

By purchasing shares (also known as ‘stocks’), you can gain a small amount of ownership in some of the world’s biggest companies.

Your investment can grow in one of two ways. For example, the company’s share price may appreciate over time, meaning you can sell it for more than you paid.

The other form of returns comes via dividends. This is where a company’s net profits are redistributed back to investors. For example, if you own 10 shares in a company — and a dividend of £1.50 per share is announced — you’d pocket £15.

This can be a substantial source of income.

Research from Link Group shows that £94.3 billion in dividends was paid out by UK companies in 2022. Many trading platforms allow you to automatically reinvest these payouts in order to buy additional shares, further unlocking the power of compounding that we talked about earlier.

But being all in on one stock is very speculative. Building a portfolio of stocks based on your own intuition and limited research is still speculative, too. Index funds take a slightly different approach.

Here, multiple stocks are bundled together in a single asset.

For example a FTSE 100 index fund would give you exposure to every company on the FTSE 100 list, and mimic the entire market’s day-to-day movements.

You could opt for an index fund focused on any specific region, such as America or the entire world, or sector, such as healthcare or finance.

Consistently buying a low cost index fund such as the S&P 500 is exactly what Warren Buffet recommends for casual investors.

The biggest benefit of index funds lies in how they offer diversification — meaning you don’t have all your eggs in one basket, and annual charges are usually pretty low. And comparing these two types of assets side by side, the biggest argument in favour of index funds lies in how they probably won’t be as volatile as an individual stock in the long term.

As you’ll find out, the choice of shares and index funds available on the market can be pretty overwhelming.

How to get started

You can find an in-depth article I’ve written on how to buy shares and index funds here — complete with a step-by-step guide to creating an account.

An important thing to mention at this point is to make sure you’re opening a Stocks and Shares ISA. This allows you to invest up to £20,000 a year — with any and all returns completely tax free.

Given the allowances for capital gains and dividends have fallen substantially in recent years, this matters.

Establishing a standing order so it coincides with your salary can be a great idea.

As the old saying in personal finance goes: “Pay yourself first.”

A question you might have right now is this: should I invest a little every month, or commit to a lump sum in one go?

One benefit of small and frequent deposits comes in the form of pound-cost averaging. This helps build a regular habit, removes emotion from the process, and reduces the risk of jumping into the market with a big investment at an inopportune moment.

And there you have it: a rough guide on how to invest your first £100.

This is an exciting journey to begin — but it’s one that requires patience and discipline.

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