How to invest small amounts of money in the UK

Investing small amounts of money regularly can help counter stock market volatility and build a substantial nest egg over time.

| 4 min read

Not everyone has a large lump sum to invest, and for those that do, it can be daunting to commit it all in one go.

Fortunately, if you want to invest little but often, or you feel nervous about markets in the shorter term, there is an alternative. You can contribute smaller amounts into Stocks & Shares ISA or into a Self Invested Personal Pension (SIPP) as and when you like, or set up regular savings from your bank account.

Almost anyone has the potential to build a sizeable sum over time by investing small amounts regularly. The important thing is getting started, and the earlier you do, the more time your chosen investments have to grow – time can be an exceptionally powerful ally.

Time on your side

Take two investors, both investing for retirement in 40 years' time.

  • One starts investing £100 per month right away, the other does nothing for 20 years, but then invests £300 per month.
  • The investments chosen both grow by 5% per year after charges.
  • At retirement, the first investor will have spent £48,000 on their monthly contributions and the second investor £72,000. Yet despite having spent much less, the first investor's retirement pot would be worth £152,252 compared to the second investor's £123,310.

Even if you don't have a multi-decade time horizon it's still possible to build up a significant sum by investing small amounts regularly. In addition, regular savings are flexible, so you can stop and start them as you wish or change the amount. You can also change where you invest to suit your views and the level of risk you want to take.

Read more: Should you invest a lump sum or monthly?

A regular investor doesn’t fear the future

By investing a given amount in a fund regularly you end up buying at different prices. Dips in the market, particularly in the early years, could even work to your advantage provided you have committed to investing for a lengthy period. If your chosen investment have become cheaper to accumulate it means your investment buys more shares or units to keep for the long term.

For example, if you invest £100 every month into a fund, the cost of the units for each purchase will depend on how the assets in the fund have performed.

  • If the units cost 50p each in the first month, you would get 200 units for £100 invested.
  • If in the second month they are 54p each, you would get 185 units for the same amount of money.
  • But if the cost dips to 40p, you would get 250 units.

By investing monthly in chunks, rather than a larger lump sum in one go, an investor ends up buying more shares or units when prices become cheaper and fewer when they become more expensive.

This can be a great way to invest because if you keep buying the market falls you could, over time, turn volatility to your advantage. This effect is known as 'pound cost averaging', and over longer periods it can help smooth out the highs and lows of the market; though there are still risks and with all investments, you could get back less than you put in.

Cut out the noise

Another important aspect of committing to regular savings is that it takes away the decision making about when to invest. It removes concerns about timing the market, whether it’s expensive or about to fall, and enforces a healthy discipline of investing at all times – good and bad. By stripping out the constant ‘noise’ of the market and economic news from your thinking and simply investing mechanically each month it can also make life a lot easier!

Many investors use regular savings with the aim of building a pension pot, putting aside money for children or to pay off a mortgage, but whatever your goal the earlier you start the easier it should be to reach your objective.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Start your investment journey

Almost everyone should consider investing once they have paid off expensive debts and saved up a rainy-day fund. Find out how to get started.

See more

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The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.