On where to invest £100 in the UK and the smart steps to take first, from building an emergency fund to increasing your income and knowledge before investing.
It’s your first real free £100 that hasn’t been allocated to bills or other spending, and you’ve just found out about investing.
This is probably going to be one of the most exciting points in your investment journey as you think about all the potential that is coming your way.
However, there are some major pitfalls.
I don’t want you to fall into any of these, so in this article, we will go through how I would think about investing £100, with some considerations for your own position in life.
Warning: it might not be as fun as you expect…
Things to Consider Before Investing
Before you invest, there are some things to consider.
In my Metronome Portfolio Model, there are four legs, and these are so important that they need to be accounted for before you even start investing.
These are what I mean by the four legs:
- Emergency Fund
- Income
- Knowledge
- Emotional Balance.
These are super important.
If any of these legs are not strong or fundamentally supportive, your entire investment portfolio can come crashing down.
This means that they really need to be addressed before you can start with that £100, or you can end up losing a chunk of it inadvertently.
Emergency Fund
Before you invest, it is essential to have an emergency fund.
This fund provides a safety net and ensures that you have money readily available in case of unexpected events.
It prevents the need to withdraw from your investments and helps maintain the compounding and growth of your portfolio.
Additionally, having a significant amount in your bank account gives you the confidence to take bigger risks in life, career choices, and investing.
Whether you want to relocate, switch careers, or start a business, having savings provides a cushion and support during transitional periods.
Determining the size of your emergency fund depends on how long you think it would take to find a comparable job or overcome a financial setback.
Typically, it’s recommended to have 3 to 6 months’ worth of expenses, but you should consider your specific circumstances.
If you’re confident in finding another job quickly, keeping two months’ worth of expenses might be sufficient.
However, if job opportunities are scarce or your salary is relatively high, you might want a larger emergency fund to sustain you during challenging times.
By prioritising income and building an emergency fund, you’ll be in a better position to contribute more of your income to investments.
UK Options
Imagine you invest this £100, and then the market has a downturn, and you find out you need to pay for something.
That would mean you’d have to sell your investment at a temporary loss.
Now, we have some good options in the UK for emergency funds, as rates are pretty good from banks. Here are some options that I would consider as potential places for an emergency fund:
- Easy access bank account: You want a competitive rate on your and the ability to withdraw almost instantly with no messing about. These combined are pretty good criteria for an emergency fund.
- Trading 212: Offers a decent rate on cash right now, It pays out interest daily, which is nice too. There are multiple other currencies available, so it’s probably a decent place for you if you’re from Europe, unlike the other options I’ll mention here.
Premium Bonds
Another option for an emergency fund is premium bonds.
This is a fun option, as there are months where you’ll win and then months where you don’t get anything, but hopefully the rate averages out and is reasonable.
Premium Bonds (at time of writing) offer a prize fund rate of 3.6% annually, with the odds of winning at 22,000-to-1 per bond number.
All prizes are tax-free, and both the rate and odds can vary.
That tax-free rate on prizes is definitely an attractive feature in favour of Premium Bonds.
I would say that a fixed rate of interest is probably more beneficial at lower deposit levels compared to the variability of the prizes of Premium Bonds, but it’s a personal decision.
Sometimes, the fun of the chance of winning big can sway people towards premium bonds.
Overall, it depends on circumstances.
From my perspective, all three options are good choices.
But back to the £100.
If you’ve not got an emergency fund, then, and you’re not going to like this, right now, the boring option is to put it towards your emergency fund instead of investing it straight away.
I do think it’s a decision that pays off down the line, and it’s why I consider it so important.
Income
Now, let’s say you’ve got your emergency fund sorted.
There’s another leg of the Metronome you need to look into before investing, and that’s income.
When you’re early on in the investing journey, increasing your income is much more likely to have a greater impact than any returns you’ll get from an early portfolio.
Let me give you an example:
An investor, let’s call him Peter, makes £25,000 a year and can save £100 a month.
That means in a year he’s saved £1,200. He has this as cash and decides to invest it.
The following year, he invests this £1,200 and gets a 20% return on his investment. (20% is very high, for context. It’s also stated as being what Warren Buffett has achieved on average across his career. I’m using 20% here to really emphasise the point.)
So Peter has invested £1,200 and achieved a 20% return.
At the end of the second year, his total is now £1,440. He has added £240 in one year to his net worth.
Now imagine he gets a raise at his company to £28,000 a year.
That’s not an insane jump in salary in his field.
If he keeps his lifestyle costs the same, ignoring taxes just to keep the math easy, then, where he was saving £100 a month on £25,000, at £28,000, that’s an extra £3,000 a year, or £250 a month, added to his net worth.
Even if he could achieve record levels of investment return, trying to improve income and then savings rate is probably going to be a better endeavour.
Now, thinking back to the £100 you want to invest, is there any possible way to use that to increase your current salary?
The ROI of increasing your salary in the early days is likely to far outweigh the impact of the investment.
Knowledge
One other thing I would think about with that £100, before investing, is knowledge.
Are you confident in your plans?
Are you comfortable with understanding what you’re investing in?
One thing I see a lot is that people find they have £100, and they think, as it’s spare, it makes sense to invest.
The problem is that simply investing is not enough.
You need a plan for what you want to get out of investing, what can help you get there, and what it is exactly that you’re investing in.
Now, you can find a lot of this information for free on YouTube.
That’s really the blessing of the modern age: how freely available information is.
But this is a double-edged sword, as there is also a lot of waffle and freely available bad knowledge that can lead people astray.
I personally think that for some people, a well-structured syllabus that goes through the important parts of investing can be worth paying for if it helps you sort the wheat from the chaff and speed learning up.
I do realistically think there is a lot to learn on YouTube for free, though.
Final Thoughts
To answer the question, Where would I invest £100 right now?
Maybe I wouldn’t “invest” it at all.
I think having these things locked down and ready is much more important.