Put away today for a brighter tomorrow. Sounds cliché but the reality is you can start investing right now with just £500. The sooner you start investing, the more interest – and in particular the more compound interest – you will earn.
It can be tempting to keep the money in your current account and spend. Investing requires patience, knowledge and dedication. More people are putting into pensions thanks to recent Government schemes from businesses, but of course these are nothing like the final salary pension schemes of the past.
You need to start investing for yourself for your future. Home buying is happening later in life. This means equity in homes will decrease for future generations. Many people upon retirement released equity from their homes or used the equity in their homes to downsize and use the remaining cash as their pension. This will become harder and harder.
If you think about investing today, you’ll need some options of course, and some ways to invest your £500.
What should you do if you have £500 to invest in 2021?
In the past it was quite sensible to put spare cash into a savings account and earn between 3%-6% interest depending on the money you invest. Those days are long gone.
Many current accounts pay no interest, and equally many savings accounts start paying 0.1% interest per year.
Yes, that means your £500 investment on January 1st is worth, on 31st December, an astonishing £500.50!
Ok, perhaps not that astonishing. Fifty pence passive income a year for year one is no way to utilise the benefits of compound interest.
Your £500 investment in Year 1 would be worth £505.02 in 10 years-time. A total investment earning of £5.02 in 10 years.
We of course need to find some better ways to invest our £500.
Stocks and Shares ISA
ISA’s are nothing new. They are Government initiated scheme of saving money without having to pay any tax on your earnings for the first £20,000 per annum you invest (this is the current 2020-2021 rate).
Further Information: -> Government’s Guide to ISA’s 2021
There are many forms of ISA (which simply stands for Individual Savings Account).
Under UK law you must pay tax on any earnings you receive. Whether this is through employment, self-employment or through investing. You can though invest up to £20,000 per year within an ISA and not pay tax on your earnings.
A stocks and shares ISA is one way to invest your £500 which hopefully will fair a little better than just holding your money in a regular savings account.
Interactive Investor is a good easy way to open a Stocks and Shares ISA – they’ve just won the Best Low Cost ISA 2021 Boring Money Award – check them out here
Usually a special ISA such as this will have a management charge. This is to pay for the services of the investment company who will manage your investment (as well as other investors) as part of a portfolio.
The service fees are usually around 0.5%-0.75% of your investment, which means for a £500 investment you would pay between £2.50 and £3.75 in fees. This is usually deducted from any earnings.
An initial investment of £500 with an investment company who pays on average 5.5% per annum, after one year your investment would be worth £527.50. You would earn £27.50 income.
Although on paper this doesn’t sound a lot for your investment it considerable bigger than the 50p you’ll earn through the banks. It becomes considerably more interesting when we start to look at year two and beyond as the compound interest begins to start.
After ten years your investment would have grown to £854.07. A total income of £354.07. A much bigger amount that the £5.02 through a savings account.
If, today, you plan to start a Stocks and Shares ISA with your initial £500 investment, could add £500 per month to your plan (so £6,000 per year) and used the same investment company with an average return of 5.5% per annum – what could you earn?
After ten years your investment would be worth £80,418.50. Your contribution to your investment would be £60,500 and therefore your income would be £19,918.50.
Remember rates are not guaranteed and you could end up with less money than you invested.