Learning to invest in the earlier stages of life places you at a financial advantage. Small investments that make money can introduce the discipline required to make sagacious financial decisions.
With that said, if you are young and struggling to make ends meet, it may seem difficult to invest a large sum of money to secure your financial future. Taking this into consideration, the following guide has been devised to help you learn about the small investment opportunities that you can benefit from.
Although, before you start investing, it is important to understand the principles and discipline that come with the process. Even in the case of small investments, you would still be obligated to make monthly payments.
Considering this, it is crucial to have a steady source of monthly income first. This way, you would be able to pay off debts and credit card balances, which would make it easier to commit to the investment. Therefore, before you invest, ask yourself the following questions:
- Is your income steady?
- Is your income inclusive of a surplus amount that could go towards the investment?
- Are you financially covered for emergency situations?
Small investment opportunities require a lot of attention. As a result, it is important to make sure that you are fully committed to the process before dipping your feet in the investment pool. However, if you manage your investments in an appropriate manner, you can grow your money in no time.
Take a look at the following investment ideas for students.
When Should You Start Investing?
When it comes to making an investment, there is no standard benchmark on the age when you should start investing. That being said, there are two rules that must be considered before making this financial decision.
Primarily you need to be sure off is if your high-interest debt has been paid off. High-interest debt refers to any loan or debt that exceeds the 3% interest rate. These may include such as a student loan, credit card debt, or a personal loan. Once you have paid off your debts, then you can start building your emergency fund.
The emergency fund refers to a backup plan that offers financial coverage, in the unfortunate situation that there is a loss of income. This fund includes the amount of money that equates to at least 3 months of the basic monthly income. Having an emergency fund is important, as it can provide you with a monetary cushion for any unexpected or unanticipated event.
Covid-19 pandemic is the best example that highlights the need for having an emergency fund. During this period, many individuals experienced a reduced or loss in income. In such a situation, individuals with a security blanket, in the form of an emergency fund, we’re able to avoid getting into a grave financial situation.
Once you have established an emergency fund and paid off all your debts, you would be well-equipped for making an investment.
Despite the preparations, it is important to note that the investment process would not be easy. This is because a small portion of your overall income would be dedicated to the source of investment. However, you would not be able to see the results for a lengthy duration of time. As a result, remaining patient and committed to the process would be essential.
Consider this process as being similar to attending university. You are required to put in the money, hours, and effort into a degree, which will not pay off until after you graduate and land a job. Quite similarly, your investment would obligate you into giving more, before showing you the desired results.
Benefits of Investing Early
As stated earlier, your venture for investing can start as early as possible. There are numerous advantages that come with early investments. Take a look at the benefits that come with early investments.
Gains from compound interest
Compound interest is the interest that you earn on the capital. It is the monetary rewards that you earn from reinvesting the interest instead of paying it out. In doing so, you are able to accumulate the interest to earn a larger amount. Essentially, when you start investing earlier, you are able to earn a larger value in terms of compound interest.
Introduction to disciplined spending habits
Learning to invest earlier also provides you with psychological benefits. When you allocate an amount from your income to your investment, a routine for disciplined spending is established. Therefore, you become accustomed to leading a budgeted financial lifestyle.
On the contrary, if an astute pattern of spending is not practiced, you would be compelled by the impulsive buying behavior, which can manifest itself into a habit.
Secure financial future
Early investments can prepare you for any potential financial hardship in the future. Although the process would not be a cakewalk, and you would still have to go through difficult moments, the financial security would prove to be beneficial in the long run. Moreover, as you become familiar with savings and healthy spending patterns, you would acquire the wisdom to navigate through financial adversity.
Possibility of an early retirement
Early investments can lead to early retirements. According to experts, the possibility of an early retirement requires at least 25 to 30 times the estimated annual expenses saved or invested. Although, the percentage amount can increase, depending on the level of luxury that you are at or wish to be, accustomed to. This would only be possible if you start saving – or investing, as early as possible.
Read More: A Step-by-Step Guide to an Early Retirement
For young individuals, saving accounts are the ideal investment option, as they are low-risk and do not require constant attention. This approach to investing requires you to pay a specific amount for a limited duration of time, and subsequently, take advantage of the fixed rate of interest.
Depending on the rate of your disposable income, you can either try a traditional savings account or opt for a high-yield savings account. High-yield savings account rewards you with a higher rate of interest, therefore, your money can increase at a rapid rate. However, a high-yield savings account does have some restrictions with transactions, thus making it difficult for you to access your money.
If you are looking for a low-risk investment, you can consider the following types of saving accounts.
ISA’s (Individual Savings Account)
ISA, or the Individual Savings Account, allows you to maximize your income to around £20,000 annually, tax-free. There are four types of Individual Savings Account, which includes cash ISA, stocks and shares ISA, innovative finance ISA, and Lifetime ISA. With this type of savings account, you are not obligated to pay tax on interest on cash, as well as on the income or capital gains, that are acquired from investments made in an ISA. For younger individuals, cash ISAs are considered the best investment approach.
Read More: Best ISA in 2021
Individuals who start out their investment ventures typically go for savings accounts. This is because this type of investment comes with a minimal level of risk, as well as a lower return. However, if you are looking for a long-term investment venture, stocks can be the right option. Investing in stocks enables you to get a higher return on your investment. Although, this method also comes with a higher risk of the potential loss.
Investing in stocks requires a 5 to 10 years commitment. Therefore, you can easily plan for a long-term investment. There are numerous platforms online that are exclusively designed for smaller investors. With these platforms, you can place a specific amount of money into the stock market by purchasing shares, corporate bonds, commercial properties, as well as other commodities. Essentially, if you are investing in stocks, it is recommended to diversify the portfolio, so the risk of loss can be reduced. You can research the different options to find investment options that cover different areas, so you can avail the benefits of your investment in the long run.
Most young individuals fail to consider the option of investing in stocks, as they are under the impression that it requires a large sum of money. However, stock investment for students is an ideal option, as you can invest an amount as little as £50 per month with various online investment tools. The online platforms, such as Chelsea and Fidelity, allow you the opportunity to invest in a pre-selected investment portfolio. These platforms also enable you to choose your own investment ventures. Moreover, depending on the platform, you can also divide the investments among two separate funds.
Additionally, you can also purchase the stocks of a company. However, this type of investment can be risky, and therefore, these stocks can be quite unpredictable. However, if you have the intention to build your investment portfolio at a steady rate, you can dribble with this mode of funding. Typically, investing in stocks requires a steady investment of at least £100 per month. Considering this, you can only avail of this option once you have a stationary and dependable income.
One of the most innovative forms of investment is crowdfunding. Crowdfunding is a manner of making investments, in small amounts, to gain capital from a large number of people. Crowdfunding opportunities are usually availed by businesses to start a new venture. Essentially, the approach of equity crowdfunding in the UK is more accessible for students and young individuals, as it enables a large number of individuals to invest in small amounts. However, crowdfunding opportunities come with a lot of risks. If you fail to carry out a proper research, you may end up being a victim of fraud and lose all your money.
There are a few types of crowdfunding opportunities that you can benefit from. The type of investment you choose depends upon your personal preference. Whether you wish to make money through dividends, share price rise, or property, you can choose the appropriate type of crowdfunding.
Equity crowdfunding refers to the way by which individuals raise money for their businesses by asking people for monetary investments in return for shares. Some of the most popular crowdfunding platforms in the UK include Crowdcube, Seedrs, Funding Circle, and Indiegogo. With these platforms, you can choose to make an investment in an individual’s business, after going through their portfolio. Essentially, your research through the provided information, as well as the terms and conditions, and choose a company that offers high returns in exchange for your investment.
When it comes to equity funding, you are provided with the opportunity to invest as little as £10. Once the start-up business takes off, a great value can be returned. However, there is no guarantee of success in this approach. Therefore, you are required to carry out in-depth research before making an investment.
Another form of crowdfunding is peer-to-peer lending. In peer-to-peer lending, you invest in a business that requires funding for its latest venture. With this approach, the business repays you the money with interest. Hence, interest becomes the primary source of income. This form of investment is relatively more profitable than equity crowdfunding, as it allows you to get a return on your investment. However, as it has a low-risk, the expected returns are not as much as equity crowdfunding.
As the name suggests, property crowdfunding deals with properties and real estate. This is another approach that you can take on, without putting in a lot of money. This type of investment requires you to invest in a property, along with the other crowdfunding members. Similar to other investments, the more money you deposit using this approach, the higher the return would be. With property crowdfunding, you can acquire an income by getting rewarded with a percentage yield of the property that you have a share in. The percentage share can range from 7 to 12% per annum. Moreover, you can also make money when the property is sold, and the shares in the capital are dispersed.
In the UK, property crowdfunding is extended by numerous platforms, including establishments such as UOWN. This platform empowers individuals to invest in a property that is under construction, with the intention to sell. Considering this, you can become an investor and a property developer at the same time.
Parallel to other crowdfunding approaches, you can make an investment for the small price of £10, which can also be divided among different properties. Additionally, this approach also provided easy access to your funds, as you can get the amount returned by selling your investment to other property Crowd funders.
All three approaches for crowdfunding are ideal for students and younger individuals. You can choose the one that best aligns with your financial goals and interests.
Invest in Real Estate Investment Trusts (REITs)
Another opportunity for investment for young individuals is a Real Estate Investment Trust or REIT. A REIT provides you the chance to own a property or an asset, without having to physically buy it. The REITs are divided among various shareholders in the form of dividends. As a result, the responsibility for paying corporate tax is avoided. Additionally, you can easily trade-in REITs on the London Stock exchange, either online or by telephone. Hence, this form of investment has some liquidity.
It provides you with an advantage over owning a single property, as your portfolio can be divided into properties situated in different geographical locations. As a result, the investment portfolio can be diversified. With that said, you would require a few thousand pounds to make an investment in Real Estate Investment Trust. While this amount is significantly more than other investment opportunities, it is relatively less than investing in a single property.
Conclusion – which option is right for you?
From introducing you to healthy spending practices to enabling an early retirement, an earlier approach to investing your income can provide to be extremely beneficial. Now, there are numerous possibilities of investment for younger individuals. You can either start a savings account, invest in stocks, try crowdfunding, or invest in Real Estate Investment Trust.
The right option for you depends largely on your budget, as well as the risk you are willing to take. The safest option for investment would be starting a savings account, however, this choice also comes with the least amount of returns. Similarly, investing in stocks may have a relatively higher level of risks involved, but this approach can provide you with greater returns. On the other hand, crowdfunding extends the chance to invest in a business or property to earn interest, dividends, or rent from it. Whereas, REIT enables you to earn from a property, without having to directly purchase it. You can consider all your options and choose the right fit for yourself.