How to Invest Your Money When You Don't Have Any Money

Whenever I tell someone I'm a journalist I can normally spot the initial interest drain from their face as soon as I add the word "financial". Of course, about 20 seconds later, their eyes brighten again when they realise I might be useful when it comes to all the stuff that's too boring to research yourself. This look is followed by a question, like: "How do I get a mortgage when my credit score is fucked?" Another one, which I'll try to answer in this article, is, "How should I invest my money… if I don't really have any?"

The short and dull answer is: you really shouldn't. However, if you don't have any debts (apart from a student loan or mortgage) and you have some cash savings, it's fine to take a punt so long as you know that's what you're doing.

One thing I hear time and again from the financial advisers I talk to is, "Before you invest any money in risky stuff like funds or shares, you should have enough in cash savings to cover six months' income." That sounds like a lot. It is a lot. But as I had to take eight months off work last year due to ill-health with minimal sick pay, I can vouch for the importance of having a cash buffer. If I didn't have family to fall back on, that kind of crisis could have been enough to put me on the streets.

From no risk to sweat-inducing high risk, there are many ways to squeeze the most from the cash you have. First up:

Before you look at investing, there are a few quick wins that will give you some extra cash with no risk at all. Firstly, use a website like MoneySuperMarket.com (the one advertised by the strutting man in denim hotpants) to cut all your bills. This could save you hundreds per year. Secondly, get the right bank account. If you're always in credit (which you should be, if you're thinking about investing) then the Santander 123 account is good. Even though they are increasing their fee to £5 [€7] a month in January, you can get up to 3 percent interest on balances up to £20,000 [€28,400] and cash back on your utilities bills. You can save up to £15,240 [€21,626] per year tax free into an ISA, but Santander's 123 and some other current accounts are currently offering better interest rates than many savings accounts.

If you already have existing savings in an ISA, make sure that you move them to one that is paying the best rate. Again, MoneySuperMarket.com will tell you which one to go for. If you take the money out of an ISA you lose the allowance you've already built up. Lastly, websites like topcashback.co.uk and Quidco.com offer you an easy way to make money when you shop online. I've made £240 [€340] over the last couple of years on the back of train journeys and hotel bookings that I was buying anyway.

When you leave your money in a savings or current account, it is protected if your bank goes bust (providing you have no more than £85,000 [€120,000] in any one account, which is unlikely if you're taking advice from the likes of me). However, because of the rising cost of rent, food, clothes and pretty much everything else apart from DFS sofas, the amount you have saved will have less buying power over time. Savers who put away £10,000 [€14,200] five years ago would find their money is worth just £8,738 [€12,400] in today's money, when you take into account the impact of low interest rates, tax and inflation (according to calculations by moneyfacts.co.uk, the comparison website).

You can just about beat inflation now, as it's currently hovering around zero, and the best easy-access account pays around 1.65 percent. But if you want to increase your potential returns, particularly if inflation starts to rise again, you will need to take on more risk. That means you could end up with less than the sum you started off with, which brings me to the first rule of investment: the greater returns, the higher the risk. You should understand your risk profile – or, bluntly, how much you are willing to lose – before you decide how to invest.

Moving slightly up the risk spectrum from a savings account are the peer-to-peer lending websites like Zopa, RateSetter and Funding Circle. They lend your money out to individuals or businesses, and in return you get a higher rate of interest than you would on a savings account – up to 7 percent, depending on how long you can leave your cash untouched. Unlike savings accounts, they are not protected by the Financial Services Compensation Scheme if the company goes bust. Also, the individuals or businesses you lend money to might not pay it back; however, each site has a way of mitigating that risk, either by taking a percentage off your interest rate to pay into an insurance fund to cover losses, or by spreading your money across lots of borrowers. There's a lot more detail about all that here.

So that's all good if you want to boost your return on cash over the short-term, but what if you've got your eye on a bigger prize? Investing in the stock market can deliver great returns over the long term, but you need to be willing to put your money away for at least five to, preferably, ten years. You must be ready to see your investment fluctuate a lot in the short term without becoming one of those guys clutching their heads in front of a big flashing screen of red and green numbers that you see on the news. The key is not to panic about short-term losses, as if you leave your money invested for long enough it should regain and exceed its initial value.

As with peer-to-peer lending, diversification is essential. It means that rather than buying shares in a single company, which is extremely risky, your money is spread across a wide range of different businesses. Don't put all your cash eggs in one basket, as it were. If you were to try and achieve this yourself it would be extremely expensive, as you'd have to pay fees for all the different shares and it would be a nightmare to keep track of all your investments. Thankfully, there is a cheaper and easier way: funds. They work by pooling lots of investors' money to buy into a vast array of companies. Actively-managed funds have an individual fund manager or a team to make decisions about the best companies to pick. Passive funds, like index-trackers and exchange traded funds (ETFs), simply follow the movements of an index, such as the FTSE 100. Actively-managed funds are more expensive and, in many cases, not worth the extra money. But there are a few "star managers", like Neil Woodford, who have managed to consistently beat their benchmark index.

I'm going to take you through two quick ways to get started. The first is via services like nutmeg.com, which are sometimes referred to as "robo-advisers". Disappointingly, these are not Stepford-like fembots who exist for the sole purpose of making you rich. Rather, "robo-advice" is a term for the interface of platforms like Nutmeg, which puts you through a simplified process in order to assign you with a risk profile and direct you towards one of its ready-made portfolios of ETFs. These are well diversified and chosen by a team of experts who have researched the market for you. The platform has a minimum investment of £1,000 [€1419], plus £50 [€70] per month, but the great thing about it is that you can play around with a dummy portfolio and see how the system works before you invest. You pay between 0.3 and 1 percent per year to Nutmeg, depending on how much money you put down, plus a fee for the underlying funds of around 0.19 percent.

The second easy route you could choose is to use a model portfolio built by an adviser like Hargreaves Lansdown on its Vantage platform. It has five ready-made Master Portfolios of actively-managed funds chosen by its in-house research team to suit investors with different risk profiles. Again, they are well-diversified. You can start with a minimum investment of £500 [€709] and choose between conservative, medium risk and adventurous options. The fees are 0.45 percent per year plus the fund fees, which are typically around 0.75 percent per year.

With both the Nutmeg and Vantage options you should invest your money via a stocks and shares ISA in order to shield your returns from tax. Your annual ISA allowance of £15,240 [€21,600] can be split between cash or stocks and shares.

Crowdfunding on websites like Crowdcube and Seedrs are popular with younger investors, because they offer the chance to invest in things like craft ale or burrito chains, which seem accessible and relevant to people who spend most of their disposable income on both of those things. However, investing in start-ups is extremely high-risk, as most of them fail. These options are much better suited to experienced investors; however, if you want to have a flutter with a tiny bit of cash, there's nothing wrong with that.

So all that stuff you hear about starting a pension early. You actually should. And for once I'm going to follow my own advice and set one up soon. Almost all companies now have to offer you access to a pension scheme, and when you pay in, your employer pays in too. So it's free money (albeit money you can't spend until you're ancient). Because of the power of compound interest (that means interest on your interest) the money you invest early on in your career will become worth much more than the contributions you make later in your working life. The experts say you should be paying in the percentage equivalent to half your age when you start. So if you don't start until you're 30, that's a cold sweat-inducing 15%. If you are self-employed like me, you can set up a private pension using one of the platforms like Hargreaves or Vantage, but sadly you won't get any employer contributions to boost your savings. For me, that's a small price to pay for never having to take the tube in rush hour and getting to work in my pyjamas.

@leahmilner

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