Despite current economic challenges, increasing your monthly investment could significantly expedite your journey toward reaching your financial goals.
Whether you are investing with Nutmeg or using another platform, we commend you for your commitment to regular investing. Setting up a monthly Direct Debit or automatic bank transfer can be a crucial step in achieving your long-term financial aspirations.
In this article, we’ll explore how consistently contributing more can make a substantial impact over a minimum of three years, potentially enabling your savings to grow faster—whether you can invest more now or are considering doing so in the future.
Is My Investment Strategy Suitable?
Let’s begin by assuming you’re already investing regularly. Although you may have automated your contributions, it’s still wise to review your finances as part of good budgeting. An annual investment review (which all wealth managers, including Nutmeg, are required to conduct) is an excellent opportunity to ensure your investments align with your goals and current circumstances.
If your financial situation has worsened—for example, due to a job loss or increased family expenses—you might consider temporarily reducing or pausing your contributions. This is completely understandable.
Conversely, you might find yourself in a better financial position than when you began investing—perhaps a recent raise or bonus has given you the means to invest more. Additionally, your priorities might have shifted. As time goes on, you may focus more on building a robust retirement fund or leveraging a Lifetime ISA to take your first steps onto the property ladder.
How Much Should I Contribute to My Investments?
If you can invest more, how much extra should you consider? Consulting with an expert is a prudent first step. Feel free to book a free call with a member of the Nutmeg team for personalized advice.
For many, a round number is appealing. For example, suppose your current contribution to a stocks and shares ISA stands at £100. What impact would an additional £50 contribution make? You might be surprised by the potential outcomes.
It’s important to remember that all investments come with risks, and past performance is not necessarily indicative of future results. However, history shows that investing in a well-diversified portfolio of equities and bonds over the long term has proven beneficial. Increasing the amount you invest each month could lead to notable long-term gains, especially through the benefits of compounding returns.
What is Compounding?
Compounding refers to the process of generating earnings on an investment’s reinvested earnings. For example, in the first year, you may earn modest returns on your initial investment. By keeping that money invested, in the second year, your investment grows to include both the original capital and the returns from year one, allowing for the potential to generate further gains.
Nutmeg provides a compound calculator to help you see how your investments could evolve over time. Keep in mind that this tool indicates potential future performance and is not a guarantee.
Example Illustration: Investing an Extra £50 or £100 Per Month Over Ten Years
Let’s consider a scenario where you start with an initial investment of £500 and contribute £100 at the beginning of each month, assuming an annual return of 5%—a reasonable average for long-term investing.
According to our calculations, after ten years, your investment could grow to a total of £16,314, with returns amounting to £3,814.
Now, if you increase your monthly contribution by £50 to a total of £150, your ten-year total rises to £24,063, with returns of £5,563.
In this instance, you’ve invested an additional £6,000 over a decade (£50 for each of the 120 months). When you compare the returns, the added growth totals £1,749 (£24,063 minus £16,314, minus the additional £6,000 contribution), highlighting the benefits of compounding in rising markets.
For our third example, let’s say you increase your monthly investment again to £200 for the same timeframe at a 5% annual return. In this case, the final value would reach £31,813, with total returns of £7,313. The additional contribution over ten years amounts to £12,000.
Using similar calculations, you’ll find the compounded impact of consistent investing leads to substantial growth over time.
Example Illustration: Investing Over 25 Years
Now let’s extend this analysis over a longer time horizon of 25 years. Assuming a consistent annual return of 5% for the purpose of this illustration, the longer your investment period, the more your money can work for you, particularly with the effects of compounding.
If, for instance, you invest £100 monthly over 25 years, your final value would be £60,505, with returns exceeding your contributions by £30,005.
If you decided to invest £200 monthly instead, your final amount would total £119,317. The difference compared to the first example would reflect a significant increase attributable to both extra contributions and compounding over time.
Illustrative Comparison of Growth Over Time
The following tables summarize your potential growth when varying monthly contributions over different time frames:
Table 1: Investment Over 10 Years
- £100/month: Final Value: £16,314; Returns: £3,814
- £150/month: Final Value: £24,063; Returns: £5,563
- £200/month: Final Value: £31,813; Returns: £7,313
Table 2: Investment Over 25 Years
- £100/month: Final Value: £60,505; Returns: £30,005
- £200/month: Final Value: £119,317; Returns: £58,817
Source: Nutmeg compound returns calculator. All returns, including dividends, are reinvested. Results do not account for inflation or any costs and charges.
The Bottom Line: Investing in Your Future
While these examples are hypothetical, they demonstrate how increasing your investments—considering affordability and a suitable timeline—can lead to enhanced outcomes.
If you would like more assistance in reaching your financial goals, consider speaking with one of our experts to help you maximize your investment strategy.
Risk Warning
As with all investments, your capital is at risk. The value of your Nutmeg portfolio may fluctuate, and you might receive less than your initial investment. Tax treatment depends on your individual circumstances and may be subject to change in the future. Past and future performance indicators are not reliable indicators of future outcomes.
Let me know if you need any further adjustments or additional information!