Does investing €50 a month make sense?

Following an upsurge in inflation and increased pressure on household budgets, saving for the future is often the first casualty of a financial squeeze. Many people believe it’s not worth investing each month if the amounts are small, but setting a little aside not only makes long-term financial sense but helps investors learn to deal with market fluctuations and develop good savings habits.

Little and often is one of the best ways to invest. By putting at least a small amount of money into financial markets every month, rather than a lump sum all in one go, investors get to buy shares, bonds or funds at a range of prices.

This helps avoid the risk of committing a large amount of money at a time when share prices are high and could be in danger of a correction. A regular €50 will buy more when markets are cheap, and less when they are expensive, but it will roughly even out over time.

The magic of compounding

Investing monthly also helps investors develop good habits. Even if you start off investing as little as €50, you can increase the amount if you receive a pay rise or a windfall. If you’re used to a certain amount of money leaving your account each month, you won’t miss it.

What’s more, you don’t have to agonise over whether it’s a good time to invest or what to invest in – it all happens automatically. This is a good savings discipline for life.

Even small amounts can build up significantly if you allow compounding to work its magic

Even small amounts can build up significantly if you allow compounding to take effect. Invested each month at an average growth rate of 5% (the approximate long-term return from a diversified stock market investment), €50 every month would grow to €7,800 over 10 years and almost €30,000 over 25 years, compared with total investment of €6,000 over 10 years and €15,000 over 25. Such returns would be extremely attractive, although it requires patience over time and 5% annual growth is by no means guaranteed.

Pay attention to costs

However, if you are going to invest relatively small amounts, you should bear in mind several critical factors – starting with cost. If you are investing only small amounts each month, make sure you’re not paying a large fixed fee.

You will generally pay a fee for access to an investment platform and another for the underlying investment; some platforms charge €10 or more for each trade. That’s a large proportion of your investment disappearing each month and makes it more difficult for your wealth to grow over time.

In general, fixed fees tend to apply to shares or other exchange-listed products such as exchange-traded funds or listed closed-ended investment vehicles.

The risk of excessive caution

Open-ended collective investment funds usually impose management charges calculated as a proportion of the total investment, which can be more advantageous for those investing small amounts. The key is to ascertain and understand what you’re paying, and how it can reduce the growth of your investment over time.

In addition, if you are investing a small amount, you should guard against being “recklessly cautious”. If you invest solely in low-yielding assets, for example in cash equivalents such as money-market funds or bonds, your investment is not certain to grow as much as the inflation rate. However, unlike stock market investments, fixed-income bond returns do not vary with the fortunes of the borrower, as long as they continue to be capable of paying the interest due.

Those looking for their investment to generate more substantial returns, particularly in pursuit of long-term goals five years or more in the future, may opt to devote a larger proportion of their assets to the stock market.

Equity investment has historically proved better for increasing wealth and beating inflation over the long term, although a downside is that share prices experience greater volatility than other asset classes. However, that risk can be mitigated by investing regularly over a long period, which should average out the prices paid and received for shares – an approach known as dollar-cost averaging.

Geographic and sector diversification

The most important rule is that your investment should be diversified. It should contain a spread of different economic sectors and be invested across a number of geographical regions – for example the US, Europe, and emerging markets such as China, India and Brazil.

By not putting all your eggs into a single basket, you can increase the likelihood that at least one part of your portfolio is performing well even when other areas are experiencing difficulty. In recent years, technology has been the dominant sector of the stock market, especially in the US, although amid a surge in volatility in early 2022, energy and mining companies provided better returns, at least temporarily.

The performance of different sectors is prone to shift up and down, in ways that even the most experienced investment professionals sometimes struggle to predict, so investing in a range of different sectors that are subject to different economic trends and forces can help to smooth out overall returns.

Sticking with the course

A final consideration for those investing little and often is that they need to stay invested through thick and thin. There will always be moments when markets go awry, but selling up quickly may not be the best response to the situation. Many investors are prone to sell just at the wrong moment, locking in their losses, while canny investors are taking advantage of low prices in anticipation of a rebound.

It is equally important to identify the right moment to reinvest. During the Covid-19 pandemic, stock markets initially suffered heavy losses, but then rebounded vigorously within weeks. Investors who waited until equity prices returned to stability would have missed out on the most dynamic period of the recovery.

Even if you only have €50 to invest each month, it is absolutely worthwhile. Not only can it build up to a sizeable amount, it can help establish a savings discipline that will be useful throughout your lifetime. You may need to be careful on fees, and on where you invest, but the most important thing is to do something rather than nothing.

Not only is regular saving, however small, of long-term financial value, it helps investors learn to deal with market fluctuations and develop good savings habits.