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Building wealth slowly but surely with regular savings

Rob Morgan
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Almost anyone has the potential to build a sizable sum over time by investing small amounts regularly. (Source: Shutterstock)

Many people assume that to become a wealthy investor you need a large pot of money to begin with. Yet 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 – and 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 cent 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 £148,252 compared to the second investor's £121,741.

Even if you don't have a multi-decade time horizon it's still possible to build up a significant sum by saving 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.

Counter volatility

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.

For example, if you invest £100 every month into a unit trust fund, the cost of the units for each purchase will depend on how the assets in the fund have performed. For example, if in month one the units cost 50p each 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 they dip 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.

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. If the market falls, you can ignore it in the knowledge you have committed to investing for a long period and your chosen investment has become cheaper to accumulate.

Regular investing with Charles Stanley Direct

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 you objective. You can start a regular savings plan in an ISA, Junior ISA, or Investment Account from just £50 per month through our website, and from £100 into a Self Invested Personal Pension (SIPP).

The prices of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than their original sum. Investors should be aware that past performance is not a reliable indicator of future results. This article is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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