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Personal Finance

Interest cuts should force you to consider investing

With interest rates at a super-low level, is your money really doing much good in savings accounts?

Are you regularly depositing money into a savings account? You may want to consider alternative methods to accumulating wealth in a pot, like investing. Interest rates are low right now with the Bank of England base rate at just 0.1%, making it difficult to spot savings accounts with mediocre interest rates, let alone anything substantial. Investing can provide an average of 5% if done sensibly.

The current situation isn’t improving much as the markets are still catching up to what happened with the COVID-19 outbreak. Fears are building that we could see a situation where the central bank could even reduce interest rates below 0% to encourage spending, but with more people at risk of losing their income and others wondering just how they can make their money grow, investing is taking off.

Countless trading apps have reported an increase in volume since the pandemic kicked off. With more people at home and some with cash to spare thanks to stimulus payments from the government, starting up an investment fund seemed like a good idea. Compared to savings accounts and ISAs, investment portfolios are way ahead in annual increase rates with 5% being an easy and stable level to maintain.

What is dividend investing?

Dividend-focused investing is the choosing of stocks for an investment portfolio largely based on factors around performance and dividend growth/payouts. Find out more about dividend investing to see if it’s right for you.

And that’s not taking into account fluctuating stock prices, which can go up as well as down. Investing £1,000 per year into stocks with an average dividend yield of 5% would result in £50 being added to your portfolio for the first year. That’s not too bad, but if you were to then reinvest all those dividends into more stocks, the following year would see you with £2,050 invested and an expected annual return of £102.50. Year three would be £3,152.50 with a return of £157.63.

This below table represents this 5% annual return from dividends being reinvested for a decade.

YearInvestedAnnual Return
1£1,000£50
2£2,050£102.50
3£3,152.50£157.63
4£4,309.63£215.48
5£5,525.11£276.26
6£6,801.37£340.07
7£8,141.44£407.07
8£9,548.51£477.43
9£11,025.94£551.30
10£12,577.24£628.86

After ten years of continuous investing less than £100 per month, you could have more than £12,000 sat in the pot. That consists of £10,000 out of your wages with a full £2,000 (or more) added from dividend payouts. These minor payouts from companies may appear small and insignificant to begin with, but they certainly add up.

Interested in getting started? You can set up an investment portfolio with nothing more than your phone. I’ve rounded up some awesome trading apps for UK residents.

By Rich Edmonds

Rich creates content for the top Windows-focused publication, but by night he tries to make his money work for him and rambles far too much here.

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