All great investors have to start somewhere and that can be the £5 note in your pocket or the £20 cheque you got for your birthday. Once you’ve opened an investment account, it’s all about getting into the habit of adding money on a regular basis and letting it go to work in the markets.

Some people think investing is only for the wealthy but they would be wrong. Investing on a budget isn’t as hard as you might think. Read on and we’ll tell you how.

HOW MUCH CAN YOU AFFORD TO INVEST EACH MONTH?

Having a budget and sticking to it can be a powerful thing. It will take no more than five minutes to build a list showing the money you have coming in and all the money going out. Write down the cost of utility bills, insurance, your typical monthly food bill, transport and any other essential purchases. Balance that total figure against your salary and see how much is left over.

Even if it is only £25 or £50, that is still enough to invest each month. Set up a direct debit into your investment account and start thinking about this outgoing as just another bill you are paying. You’ll soon get used that money leaving your account – except for this item on your list, it’s money that remains yours and not someone else’s.

Many apps from banking providers let you monitor your spending. Some even have something called ‘round-up’ services which is a neat way to squirrel away small amounts of money. Imagine if you had a £2 coin and went to buy a sandwich costing £1.79. You might put the 21p change in your pocket and forget about it.

With so many people now paying for goods via debit card, round up apps effectively take this concept into the digital age. The 21p ‘change’ from buying that sandwich would automatically be put into a savings account – you’re rounding up each card transaction to the nearest pound. 21p won’t make you rich but do that transaction every day for a year and you’re looking at £76.65 in savings.

As your career progresses, each time you get a pay rise consider increasing the amount of money you invest each month. You’ll thank yourself 10 or 20 years down the line.

WHICH ACCOUNT SHOULD YOU USE?

This depends on when you want to access the money and your age. If you want to save up for something later in life but want the flexibility of being able to sell your investments and withdraw the proceeds as cash whenever you want, then choose a Stocks & Shares ISA over a SIPP (self-invested personal pension) as there are no restrictions on withdrawals.

Anyone aged between 18 and 39 is eligible to open a Lifetime ISA account where the Government will top up the value of your deposits by 25%, up to a maximum £1,000 each year. This free money is a great way to give anyone investing on a budget a nice boost but there is a catch.

You can only take money out of a Lifetime ISA to fund a deposit on a first home or if you reach age 60 – otherwise there is a 25% penalty charge. You cannot take money out of a SIPP until you are aged 55.

The alternative is a dealing account which has no withdrawal restrictions but any gains on the value of your investments when you come to sell or dividends will be subject to tax. You don’t pay tax on capital gains or income for investments inside an ISA or SIPP.

WHAT’S THE MOST COST-EFFECTIVE WAY OF INVESTING EACH MONTH?

You need to consider two key points: the first is the cost of buying and selling investments and the second is the custody charge which is essentially a fee imposed by your platform provider for holding your investments.

These charges vary from provider to provider. Some will let you buy and sell funds for free but the custody charge can be higher, such as Hargreaves Lansdown which charges 0.45% a year on the first £250,000 of money held in funds.

Others will charge more to transact funds but have a lower custody charge. For example, AJ Bell charges £1.50 to buy and sell funds (or nothing to buy AJ Bell’s own funds) but only 0.25% custody charge for the first £250,000 of assets in your account.

Some financial apps often come with no charges to buy or sell investments and low custody charges, but limitations on what you can hold. For example, Dodl by AJ Bell has an annual charge of 0.15%, with a £1 minimum per month, and no charges to buy or sell investments. It has a limited range of stocks and funds – this might suit someone just starting out or trying to keep things simple whereas others may want a broader choice.

WHERE SHOULD YOU INVEST YOUR MONEY?

Those with only a small amount of money to invest each month might be better suited to funds than other investment types for several reasons.

First, funds can provide diversification compared to buying an individual company share. One fund might have stakes in 100 different companies so if something bad happened to one holding in their portfolio, the other holdings should help to cushion the blow.

Second, the transaction costs are often cheaper for funds versus buying shares, investment trusts or exchange-traded funds. Again, this varies from provider to provider but let’s take AJ Bell as the working example.

It costs £1.50 to buy a fund with AJ Bell compared with £9.95 for other investment types. If you’ve only got £50 to invest each month, that difference in transaction cost makes a massive difference.

Aside from the transaction fee, it is worth considering the ongoing charges built into a fund, investment trust or ETF. The difference may seem minuscule when you’re starting to invest, but over time costs add up.

IS THERE A MINIMUM AMOUNT YOU MUST INVEST?

In theory, no, if you are buying funds. But in practice, you need to think about the proportion of the investment that is taken up by transaction charges.

If you invest £5 in a fund, a £1.50 transaction fee equates to 30% of the money you’re putting in the fund. One solution is to feed your ISA or other investment account with money each month until you’ve built up enough whereby the transaction fee is only a small percentage of the investment.

For example, let’s say you put £25 in your ISA each month. After three months you would have £75 ready to invest in a fund and the £1.50 transaction fee would only be 2% of this amount.

CASE STUDY

Flo is 25 years old and can afford to invest £50 a month into a Lifetime ISA. She understands the money cannot be taken out without penalty unless it is used to buy a first home or once she turns 60. She says that’s fine because her goal is to buy a flat when she is in her early to mid-30s.

She doesn’t want to take excessive risks and is happy to buy a multi-asset fund to take advantage of the built-in diversification. After reviewing a few options, she opts for Vanguard LifeStrategy 80% Equity (B4PQW15) which has approximately 80% of its assets in shares and 20% in bonds.

It costs £1.50 each time she wants to invest money in the fund so Flo decides to build up three months’ contributions before transacting. On the first of January, April, July and October, she places an order to buy £150 worth of the Vanguard fund. At the end of the first year, she will have invested £600 of her own money and received an extra £150 from the Government as the Lifetime bonus.

Next year, she hopes to increase her monthly contributions to £75 a month, amounting to £900 of contributions across the year plus a further £225 from the Government bonus. In total after two years, she would have £1,875 in her account, excluding any changes to the value of the fund. That illustrates how it is possible to go from a starting point of £50 to having a decent chunk in a relatively short period of time.

DISCLAIMER: AJ Bell referenced in this article is the publisher of Shares magazine. The author (Daniel Coatsworth) and editor of this article (Tom Sieber) own shares in AJ Bell.

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