How you can turn £20 a month into a £9,000 savings pot - tax free

Cash savings are a must first of all, but investing can produce greater returns in the long term

(Getty Images)

SPONSORED BY TRADING 212

The Independent Money channel is brought to you by Trading 212.

Saving for a goal like buying a first home or going travelling can feel like an impossible task, with many people left with hardly any spare cash after paying their bills.

But there are ways to turn just £20 a month into thousands of pounds in just a couple of years - and picking the right account could give you hundreds of pounds extra.

What’s more, putting away a tiny bit of cash into a stocks and shares ISA each month could boost your savings by tens of thousands of pounds long-term, analysis by Interactive Investor for The Independent shows.

Why a stocks and shares ISA?

Stocks and shares ISAs let you invest your money into the stock market and anything you earn is tax-free, which means your savings can increase more over time.

You could also save your money into a cash ISA if you don’t want to invest. These accounts let you hold cash and earn interest without owing any tax.

However, money invested in the stock market has historically grown faster than money held in cash over longer periods, so it could be a better option if you’re saving long-term.

Analysis by Interactive Investor shows that just £20 monthly invested in a stocks and shares ISA achieving typical 6 per cent growth every year (after fees) would give you a nest egg of £1,356 after five years, growing to £9,071 after 20 years.

But slightly bigger monthly deposits could boost your savings by considerably more over time. That’s because of the so-called ‘snowball effect’, also called compounding.

How much could my money grow?

For example, if you increased your monthly contributions to £50 per month, you would have £3,475 after just five years, rising to £22,678 after 20 years.

ADVERTISEMENT

ADVERTISEMENT

Monthly contributions of £100 would give you £6,950 after five years, or a whopping £45,356 after 20 years.

(Getty Images)

Vanguard’s LifeStrategy 60% Equity Fund, one of the most popular funds in the UK with around £18bn invested, returned around 5.6 per cent over the past five years.

However, some funds have returned more than this over the past five years, and higher investment returns can also snowball and give you a much bigger nest egg.

For example, the Vanguard LifeStrategy 80% Equity Fund returned around 8.4 per cent annually over the past five years.

If you had invested £20 a month into this fund for five years, you would have £1,393.96 now, while a £50 monthly investment would now be £3,484.89, and a £100 investment would be worth £6,969.79.

Assuming the same returns over 20 years, you would have £11,577.14 if you invested £20 a month, rising to £28,942.86 if you invested £50, and £57,885.71 if you invested £100.

The importance of consistency

Camilla Esmund, retail investment expert at Interactive Investor, explained: “Investing can be intimidating, and many don’t know where to start. But, if suitable for you, it can be a game-changer.

“Although cash can offer short-term security, research shows that investing is typically the better option for long-term growth.

“The good news is that even small, regular contributions can add up significantly over time. The earlier you start investing, the better, as long-term growth benefits from the power of compounding.

“This is where you reinvest any interest to your total sum, earning interest on this too, which creates a snowball effect over time.”

Monthly contributions for cash or investing	£20	£50	£100
After 5 years of stocks returning 6% annually	£1,356	£3,475	£6,950
After 10 years of stocks returning 6% annually	£3,250	£8,125	£16,251
After 20 years of stocks returning 6% annually	£9,071	£22,678	£45,356
After 5 years of cash ISA with 4% interest	£1,323	£3,309	£6,618
After 10 years of cash ISA with 4% interest	£2,934	£7,335	£14,671
After 20 years of cash ISA with 4% interest	£7,277	£18,194	£36,388

If you don’t think investing is right for you, consider putting your money into a top-paying cash ISA or savings account.

Putting £20 a month into a cash ISA paying 4% interest would give you £1,323 after five years, or £7,277 after 20 years, while larger £50 deposits would grow to £3,309 after five years and £18,194 after 20 years.

However interest rates can change frequently and spent more than a decade under 1 per cent up until 2022.

How to get started investing

To get started, open a stocks and shares ISA with an investment platform which suits your needs and experience.

Make sure to check the fees for the account first. Some accounts charge higher fees for a more comprehensive service, but this might not be necessary for you.

Ms Esmund said: “Always keep an eye on fees. It can be disheartening to integrate good habits, only for your growing pot to be eaten away in unnecessary fees. Over decades, the differences can add up to tens of thousands of pounds.”

Deposit money into the account or set up a regular direct debit, such as £50 a month. Some accounts may have a minimum investment, so check this is suitable for you first.

If you need help with investing, consider speaking to a professional, but be aware they may charge fees.

When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.