If you’re just beginning your path to Financial Independence it’s likely that it is time to finally invest your first £1,000. Unfortunately, you’ve likely heard about investments but understand very little, feel afraid and are uncomfortable about tackling this alone.

In this post, I will be walking you step by step through the process that I would use to invest your first £1,000. By not needing expensive or untrustworthy financial advisors you will be able to avoid high fees and those who have their personal interests first.

One point to note is that I am not a financial advisor and therefore cannot hand out personal financial advice. This is simply the step by step process that I would use if starting from scratch again and had to invest your first £1,000.

In this post we will cover:

• Steps you need to take before you are ready to invest your first £1,000
• Understanding your near future plans
• Understanding your risk tolerance
• Choosing an investment account type
• Choosing an investment broker
• How to open your new account
• Which funds to choose
• When to buy and sell
• Common traps to avoid
• Using dummy accounts
• Conclusion

Steps you need to take before you are ready to make your first investment:

Depending on your situation it may be that there are other financial priorities that you need to tackle before investing your first £1000. These steps should be:

• Repay all high-interest debt (above 8%)
• Build an emergency fund (1-3 months of expenses in cash)
• Repay remaining short term debt (between 3% to 8%)
• Enlarge emergency fund (3 – 6 months expenses)

Once you have completed the above 4 steps you should consider if it is time to invest your first £1,000. To learn more about the steps to financial independence read this blog post – How to go From Broke to Financial Independence: 12 Steps that Anyone Can Follow.

Step 1: Understanding your near future plans

Before deciding how to invest your first £1,000 you need to understand or at least be able to guess what your near term plans are. Once your money has been invested its value will increase and decrease Therefore, investing for the short term can be risky and more akin to gambling. Generally, the short term can be considered to be less than 3-5 years (depending on who’s advice you listen to).

To help understand your near future plans consider whether any of the following is likely to happen in the next 3-5 years:

• Buying a house
• Having a child
• Getting married
• Getting made redundant (especially if you have skills that are not in demand)
• Taking a sabbatical
• Buying a car – personally, I would advise against an expensive/new car but it is not for me to make your decisions. Read more about The True Price of Owning a Car to understand why this one choice can have a huge impact on your path to financial independence.
• Any other potentially life-changing event

If any of your near future plans involve the use of the money you want to invest right now then it may be more astute to either invest for low volatility (fewer ups and downs) or not to invest your first £1,000 at all.

The reason to be cautious when investing money you need in the near future is that:

• You may need to withdraw it at a time during which it is worth less than when you invested it
• If the value is now less you may no longer be able to afford to buy what you require/desire/need.

Imagine a situation in which you invest all of your £20,000 house deposit. Six months later you find the perfect house at a great price and want to put an offer in to buy it. However, the market has crashed and now you look at your investment account and the £20,000 is now worth only £16,000. You no longer meet the lending requirements and you cannot afford the house… bummer.

The picture above shows some time periods in which it would have been either a terrible or bad time to invest your first £1,000 if you needed the money in the short term. However, in all cases, a profit would have been made if those investments were held for the long term.

Step 2: Understanding your risk tolerance

Once you understand your near future plans you need to begin to get an idea of what your risk tolerance towards investing is.

“Simply put, risk tolerance is the level of risk an investor is willing to take.”

Charles Schwab

In general the riskier an asset the higher the chance it:

• Outperforms the average
• Underperforms the average

A simple way to imagine your risk tolerance is shown below:

• Green – Low-risk investment (minimal upside and minimal downside)
• Yellow – Moderate risk investment (moderate upside and moderate downside)
• Orange – High-risk investment (high upside and high downside)
• Red – Very high-risk investment (very high upside and very high downside)

The reality is that when investing, your potential upside should always be higher than your potential downside.

The picture above is just useful to see how the different risk levels compare. This is especially true for long term investments. In the scenario in which you invest in a broad-based index fund your risk tolerance may look like the below:

When trying to determine your risk tolerance you should consider the following:

• How would you react to a drop in the value of your investments by…
  • 5%
  • 10%
  • 20%
  • 50%
• What are the consequences of your investments dropping in value?
• Would a drop in investment value affect only you or others around you?
• Is the money you are investing needed for you to survive?
• Do you have other money or is this all of your liquid assets
• Are you willing to accept more risk for higher rewards?
• Have you invested before or do you have no experience

If you are looking to invest in index funds (recommended) then the Vanguard website has a great questionnaire to determine your risk tolerance.

It can be found here and will give you an idea of the asset allocation a person with your risk tolerance should hold.

Another questionnaire (which gives you a risk tolerance score instead) can be found here.

Step 3 – Choosing an investment account type

Before you begin to invest your first £1,000 it is important that you choose the best-suited account type for you. Although this may be of minimal benefit in the short term over a long duration it can make a huge difference. This is because the tax benefits of some accounts types are far superior. All of these accounts will be related to their ability to invest in stocks and funds. No cash accounts will be considered – because of current low-interest rates all cash accounts will perform relatively similarly… And because this is a post designed to help you invest your first £1,000.

General Investment Account

A general investment account is exactly what it sounds like – a generic account that provides minimal extra benefits apart from being a safe haven for your investments.

Benefits:

• Quick and simple to open
• No limit on contributions to the account
• No limit or penalties on withdrawals from the account
• Can hold or open as many accounts as you wish
• A broad range of stocks and funds to invest in

Downsides:

• No tax benefits – any income above your total yearly capital gains limit will be subject to capital gains tax when withdrawn
• Must pay tax on dividends above £2000 per year
• Will be subject fully to inheritance tax upon the holder’s death

Stocks and Shares ISA Account

ISA stands for an Individual Savings Account and is one of the most common accounts used by savvy investors due to the great tax benefits it provides.

Benefits:

• All gains in your account are free from capital gains tax
  • E.g. if your £20,000 investment grew to £100,000 over 30 years you could withdraw the £100,000 tax-free at any time
• Quick and simple to open and offered by the majority of providers
• Dividend payments are tax-free
• There are potential inheritance tax advantages for an ISA account. Read more here
• A broad range of stocks and funds to invest in

Downsides:

• Limit of £20,000 contribution per year
• Any withdrawals cannot be replaced without affecting the £20,000 contribution allowance (although some providers are offering ‘flexible’ ISAs which allow this).
• Must be transferred from one provider to another to keep tax free status which takes time
• Can only pay into one ISA per year (except when used in tandem with a lifetime ISA). You can however hold multiple accounts (if you opened them in previous years).
• Some smaller company shares cannot be purchased in an ISA account – however, this is extremely rare and unlikely to affect you

Lifetime ISA

A LISA is a fantastic government saving scheme for first-time buyers and should be an option explored by anyone likely to fall into this demographic.

Benefits:

• The government will top-up your contributions by 25% (up to a maximum of £1000 per year)
• Growth of investments is tax-free (same as within an ISA)
• Dividend payments are tax-free (same as within an ISA)
• Range of stocks and funds available to purchase

Downsides:

• You can only contribute a maximum of £4000 per year
• First-time buyers only will gain the benefit of the free 25% top-up. If the money is not used for a first home you will pay a penalty of 25% (which actually works out as a loss of just over 6%. (£1000 + 25% = £1250. £1250 – 25% = £937.50)
• LISA contributions count towards the £20,000 total ISA contributions. E.g. If you invested £4000 in your LISA you could only invest £16,000 in your ISA (in the same tax year)
• A smaller variety of providers
• Can be more complex to open
• Must be aged between 18-39 to open
• House bought with LISA money must cost no more than £450,000
• House must have a traditional repayment mortgage (no buy to lets etc.)

Each year a person can contribute up to a maximum of £4,000 and the government will add 25% of your contribution per year. E.g. if you deposit the full £4,000 throughout the year the government will top it up by £1,000 to a total of £5,000.  A guaranteed 25% return is the best you’re going to get anywhere so if you’re looking to buy a house this is certainly the best saving vehicle.

SIPP

A self-invested personal pension is an account that allows you to save money for when you retire. It is very similar to a pension that you may hold with an employer but it is much more flexible (more investment choices), you have greater control and the contributions come from yourself.

Benefits:

• Contributions to a SIPP are qualified for tax relief meaning that when you invest you are boosted by the value of tax you had already paid on your income. E.g.
  • If you are a basic rate taxpayer (20%) and contribute £2000 to your SIPP you get an additional £500 in tax relief. This brings the total to £2500. (£2500 – 20% = £2000). A higher rate taxpayer (40%) would receive an additional £500.
• You can have a SIPP and a workplace pension
• It is possible to invest by lump sum or regular monthly payment.
• Can contribute up to 100% of your yearly earnings or up to the annual allowance of £40,000.
• Many providers offer SIPPs with low fees
• When you come to pension age you can withdraw 25% of the investment tax-free

Downsides:

• Tax relief (the additional top-up) must be claimed through a self-assessment tax return
• Tax is paid upon withdrawal of funds (this is when you have retired and are likely in a lower tax bracket
• No additional contributions are given like those in an employer pension
• Pensions have a lifetime allowance (during which they are tax-free). This is currently £1,073,100 and includes the growth of your investments.
• Cannot withdraw money until you are 55 (changing to 57 in 2028) unless you want to pay large amounts of tax (55% usually). There are exceptions for reasons like having a terminal illness or certain careers.

Overview

Often your best tactic for long term wealth building will be to use a combination of the above accounts. However, as this blog post is focused on how to invest your first £1,000 I recommend the following:

• Invest in a LISA if you plan on buying a house in the future (and will be a first-time buyer)
• Invest in an ISA if you are sure you will not buy a house in the future (or if you would not be a first-time buyer)

If you are unsure whether you will buy a house I believe it is more sensible to open a LISA as the penalty is small compared to the benefit of the 25% government top-up.

Once you get more familiar with investing and have more investable income you should begin to consider a SIPP (however this may not be suitable for some depending on their employment status and company pension).

More info can be found here:

• ISA and general investment account
• LISA
• SIPP

Step 4 – Choosing an investment broker

Now that step 3 is completed and you know the type of account you want to open, you need to choose a broker who best meets your requirements and who is most deserving for you to invest your first £1,000 with them. For a comprehensive list of different brokers and their fees, you should check out this blog post from the Monevator.

Some of the most popular providers are:

Vanguard

Vanguard is the OG of index fund investing and it is highly likely that they will offer a very competitive version of the index fund you may wish to invest in

Positives:

• Percentage based fee of 0.15% per year (£1.50 for each £1000)
• Easy and simple to use
• No fees for investing in their funds
• Fees are capped at £375 (in case you have more than £250,000 invested)
• Offer ISA and SIPP accounts

Drawbacks:

• Only offer vanguard funds

Trading 212 & Freetrade

Trading 212 and Freetrade are smaller and newer platforms designed to offer the user fee free trading.

Positives:

• No annual fee for your investments
• No fees for purchasing shares
• Range of ETFs and index funds
• Large range of individual shares
• An app full of information that is easy to use
• Offer an ISA
• Can buy fractional shares (e.g. 0.1% of a company – useful for shares with a high price (Amazon = $3000 a share)

Drawbacks:

• Buying and selling pricing is often worse
• Less customer support
• Less choice of funds
• Fee-free trading can encourage day trading
• Freetrade ISA is £3 a month
• No SIPP account

Platforms like Trading 212 and Freetrade are not free to run or a charity and therefore they need to make a profit in other ways. These tend to be through:

• Spreads between buying and selling price
• Currency conversion charge
• CFD trading platform (best avoided unless you are an experienced trader)

Hargreaves Lansdown

Hargreaves Lansdown is the largest provider in the UK but that does not mean it is the right choice for you. They are also the first provider on this list that offers a lifetime ISA.

Benefits:

• Offer an ISA, LISA and SIPP
• No yearly fee on stocks, ETFs and bonds
• Excellent range and choice of funds and shares
• Easy to use and intuitive platform
• No charge for buying or selling funds

Drawbacks:

• Percentage based yearly fee of 0.45% on funds (gets cheaper over £250,000)
• Individual share trades cost £11.95

With small amounts of money, it is best to consider either a no-fee or percentage-based fee structure. Some providers offer a flat fee but this does not become cheaper until you have a sizable chunk of money invested. E.g.

Interactive Investor

Interactive investor costs £10 a month for a general investment account and an ISA and £10 a month for a SIPP. These costs stay the same regardless of the amount of money invested. They also charge £7.99 for a trade but if you set up regular investing (same trade each month on a set date) this is free.

Benefits:

• The fixed fee model is beneficial to those with large investments
• Offer ISA & SIPP
• No fees for regular monthly investments

Drawbacks:

• The fixed fee model can be more expensive than percentage-based if your investment pot is smaller
• The website/app is not hugely intuitive but works well enough

Overview

• Value simplicity and want to invest in index funds – Open an ISA account with Vanguard and invest your first £1,000
• Value the ability to buy and sell funds and individual shares free of charge – Open an ISA account with Trading 212 (avoid the £3 fee with Freetrade) and invest your first £1,000.

Please bear in mind that these two options are best suited to somebody who wants to invest their first £1,000. Once your investment pot grows larger it is likely worth reconsidering your options to best suit your needs at that time.

Step 5 – How to open your new account

Hopefully, you’ve followed the previous steps and now you know exactly what account you want to open and who you want to open it with. Luckily enough this is generally straight forward and in order to invest your first £1,000 you will need to:

• Download App/go to the website
• Click the open new account button
• Complete security information (passwords etc.)
• Choose account type
• Enter personal details (required by law for tax purposes)
• Complete identity-check
• Deposit funds (I usually recommend a free bank transfer and a small amount just to gain confidence

For a step by step video you can watch the below:

• Vanguard
• Trading 212 – The video shows opening a general investment account but the process is the same
• Hargreaves Lansdown

I also recommend that you enable 2-factor authentication if able and preferably with an authenticator app instead of a text (I use Google authenticator)

Step 6 – Which funds to choose

Now that you have an account set-up we’re finally getting to the business end of this process – choosing what to invest your first £1,000 into. Personally, my investment philosophy (and what I recommend) is to buy broad-based index funds so this is what we will mostly be discussing in this section. Although it is possible to outperform the market by picking individual shares this requires a large commitment of time and experience and even then most people/funds underperform an index fund.

However, if this is your jam then there are multiple YouTubers or bloggers who cover this topic in great detail – just be aware that the risks are much greater and if anymore tries selling you a foolproof system or formula they’re almost certainly lying to you.

For simplicity, we will also be classing ETFs as index funds in this case because for our purposes they are pretty much the same (ETFs are bought and sold like shares, often have a lower investment requirement and can be more beneficial from a tax point of view).

When choosing an index fund/ETF you should focus on:

• The index being covered (size of companies, type of industry, region etc.)
• Expense ratio

The Index

The indexes you can choose vary greatly but some of the most common are:

• Global All Cap – Large, mid-sized and small companies in developed and emerging markets around the world (you essentially own a bit of everything)
• Large Cap (developed)- The largest companies in the developed world (US, UK, Germany, Switzerland etc.)
• Mid Cap (developed) – The mid-cap companies in the developed world
• Small-Cap (developed) – The smaller companies in the developed world
• Emerging Market Large Cap – The largest companies in emerging markets (China, India, Brazil etc.)
• Emerging Market All Cap – All the companies in emerging markets
• FTSE 100 – The 100 biggest companies in the UK
• S&P 500 – The 500 biggest companies in the US
• Total Bond Market – Index of global bonds
• Other – Precious metals, lumber, sustainable energy etc.

Ongoing Charge

The ongoing charge is simply the percentage fee you pay yearly to the manager of the fund after you invest your first £1000. Both index funds and ‘managed’ funds (where a fund manager chooses companies to invest in etc.) have costs to run them. As index funds are simply algorithms (a computer just allocates a percentage of the fund depending on characteristics like the size of the company) their fees are much cheaper.

The higher the fee the less profit you will generate so it is best to minimise these. Index funds can have fees as low as 0.1% whereas managed funds can be as high as 1% (although rarely I have seen funds above 1.5%). On small amounts, it doesn’t seem a lot but this difference in fees will compound over time and end up making a big difference to your investment value in the future.

Lowering your fees is one of the only ways to guarantee increased performance. If you have two of the same index offered by different providers then it usually makes sense to choose the cheapest.

Which funds to choose

To help you choose your funds you should refer to step 2 in which you have learnt what your risk tolerance is. This is required for the following step. Please remember that this is simply what I would do with £1000 and is not financial advice.

Low to medium risk Investor:

If you are a low-risk investor then the most simple method is to invest in a Vanguard LifeStrategy fund. There are 5 funds to choose from as shown below. The lower your risk tolerance the higher your percentage of bonds. Those approaching retirement age who are more concerned with preserving wealth (instead of growing) also follow a similar strategy.

Generally the higher percentage of bonds you hold the less your investments will increase and decrease. For a long term investor, it makes mathematical sense to hold more equity (stocks) but it is riskier. A comparison of these funds between May 2015 and May 2020 can be seen below.

Higher risk tolerance – Low input option:

It may be that you have a slightly higher risk tolerance and do not want to invest in LifeStrategy funds. If this is the case then often the best option is to simply buy the cheapest global all-cap index fund. This will give you 100% equity exposure to pretty much all of the markets in the world. The bigger the market the larger the percentage of the fund will be invested there.

Options for this include FTSE Global All Cap Index Fund

This type of fund gives you great returns and great diversity and will be a great choice for pretty much all people still in the wealth-building phase.

If this is your first time investing then invest here.

Higher risk tolerance – Higher input option

If you have a little more experience in the markets and want to tailor your funds then you can consider investing in the following:

• Developed market large-cap fund
• Developed market small-cap fund
• Emerging market all-cap fund

The percentage you decide to allocate can be based on what you feel will outperform in the current years. Over the long term, small caps have tended to outperform large caps… although that has not been the case for the last number of years.

Personally, this is the method I like to use as it gives me more control over my allocation of investments. If you have little knowledge of the stock market and want complete passivity you may just be better sticking with the global all-cap though.

Also, remember that the bulk of your investments should probably be in the large-cap fund.

No idea of risk tolerance

If you have no clue about your risk tolerance and never want to worry about your investment again then a Vanguard target retirement date fund could be perfect. Here you simply choose the date of your retirement age and Vanguard chooses the appropriate fund. The further you are from retirement the larger the percentage of equities. This allocation will also adjust as you age meaning it is truly hands-off.

My only concern with these funds is that none are 100% equity and if you are a little higher risk this will likely not work out to be the best option over a long period of time.

Step 7 – When to buy and sell

Once you invest your first £1,000 you need to learn and understand the general principles behind buying and selling when it comes to investing. We will tackle each of these in turn.

Buying

When it comes to buying (investing more) you should do the following:

• Invest regularly – Ideally each time you get paid. Often it is better to invest just after you get paid instead of just before you next get paid because it forces you to budget with your remaining money.
• Keep buying your previously chosen funds (step 6) instead of the latest flavour or what’s on the news/Reddit.
• Invest only money which is not required in the short term – Step 1 walks you through understanding when it is suitable to invest. If you have a large and unusual expense coming up next month it may be more sensible to invest nothing this month and save for that instead
• Invest according to your risk tolerance (step 2). If your risk tolerance changes then you can look at changing your allocation. You may choose to review this tolerance yearly
• Dollar-cost average – This means simply that you invest regularly over a long period of time instead of waiting for market crashes or corrections. It also prevents you from investing all your money right before a stock market crash.
• Ignore news, trends, scaremongering and meme stocks. History has proven that long term holding of index funds and dollar-cost averaging is the best way for the majority of people to build wealth. Once you’ve been in the game for a while you’ll realise there’s an article or interview every week from a permabear (someone who thinks the market is always going to go down) explaining why he/she thinks the market will crash. They’re nearly always wrong, rarely worth listening to and often have their own interests at heart (profiting from a crash).

You may also consider:

• Create an investment strategy/philosophy – Plan what you will do in the event that the stock market drops by 10, 20, 30, 40 or 50%. When this happens you can review this and stick to the plan instead of panic selling at the worst time – This is something I have done since I first experienced a stock market crash/correction
• Setting up a standing order – many people have a standing order set up that transfers X amount to their investment account each month.
• Keeping an additional percentage of cash available in case of a market crash – personally, I don’t (apart from my emergency fund) and prefer to rely on dollar-cost averaging

Selling

When it comes to selling your investments you should do the following:

• Sell only when you have accumulated enough to purchase something you had planned for – E.g. you have been investing for the last 10 years to
  • Purchase a home
  • Purchase a buy to let property
• Sell only when you have an ongoing emergency – large expense from uninsured injury etc (unlikely in the UK but possible if abroad). Ideally, your emergency fund should be able to cover 99% of emergencies but there are always exceptions
• Reached retirement age and need to withdraw money each month to live on
• If you have somewhere better (in your opinion) to invest the money – perhaps you want to invest a percentage of your investments into a business or as an angel investor etc.

Common traps to avoid:

Unfortunately, there are numerous mistakes and errors which individual investors (and professional investors) regularly make. If you know and understand these then you are less likely to make them when you invest your first £1,000. Some of these are:

• Selling in a crash – Selling your investments after the stock market has crashed is one of the worst decisions you can make. As the stock market is not rational in the short term the share price of a company or an index does not necessarily accurately reflect the value contained. Instead, you should hold your investments and if possible ‘buy the dip’. This is when having an investment strategy/philosophy will reward you handsomely.
• Timing the market – Don’t try to time the market and instead invest regularly each time you get paid to dollar cost average. Trying to time the market will likely result in you waiting and waiting and waiting but never investing. You may get lucky once but never consistently.
• Individual shares – Individual shares can spell disaster for an inexperienced investor. If you do choose to invest in individual companies then do so only with a small percentage of your investments. Also if you’re not willing to do the following then stick to index funds:
  • Research the company in depth
  • Create your own bullish case
  • Listen to quarterly conference calls
  • Read investment reports (10Ks and 10Qs).
  • Keep up to date on related news

• High fee funds – investing in index funds or managed funds have fees attached to them. These fees are a percentage of what you invest and are paid to the managing company of the fund. You should try to keep these fees as low as possible (index funds have the lowest fees around). A 1% Vs 0.1% fee over 40 years after you invest your first £1,000 and keep investing £1,000 per month could affect your return as much as
  • 7% minus 0.1% = £2,334,739
  • 7% minus 1% = £1,857,144… Ouch
• Changing your provider if a competitor reduces their fees – If the change in fees is minimal then it is usually not worth changing providers. When it comes to ISA transfers you will often be out of the market for a period of time so it is simply better to live with it
• Believing you need an advisor – For the majority of us who will benefit from a relatively simple investment strategy you are usually far better off without a financial advisor for the following reasons:
  • A financial advisor will always charge a fee (usually around 1%)
  • They will likely have their own interests ahead of your own
  • They will often advise you to invest in high fee investments
  • Can neglect to manage your portfolio to a high standard (I know of an elderly person who had been left in the same fund for the full 20 years she had been invested with the advisor – this fund may have been good 20 years ago but was absolute trash now. Unfortunately, the miss on returns cost her hugely)
  • Often look to overcomplicate to justify their fee – if they recommended just owning one or two index funds you may realise you are better off without them…

The other benefit of not using a financial advisor is that you will become much more knowledgeable about investments by managing them yourself. By starting when you have a low-value investment portfolio you can build your confidence as it grows in value. The main reason people hire and pay large fees to financial advisors is because they do not have the confidence to do this themselves even though they all have the ability.

Of course, there are times when you need a financial advisor but this will usually be applicable if:

• You have a complex tax situation
• Need bespoke pension advice
• Need help setting your estate up for inheritance reasons

Using dummy accounts

If you want to learn to invest yourself but are wary of using your own hard owned cash in case you make a huge mistake then opening a dummy account may be the best option for you. Many investment platforms offer this service and generally your ‘dummy’ account is funded with fake cash and you can use the platform just as you would with real money.

Positives:

• Allows you to get familiar with an investment platform before committing real cash
• Allows you to get familiar with finding and buying/selling funds
• Gives you encouragement and confidence that you can do this alone

Drawbacks:

• Unfortunately, dummy accounts often encourage day trading (buying and selling very regularly) as otherwise using fake money to buy funds is rather boring (in reality boring is good).
• You will find that because there are no consequences you will often make decisions that you would otherwise not make
• Can get annoyed if you miss out on gains or get scared away if the market performs badly for the period you use the dummy account

Overall I don’t generally really recommend using dummy accounts (unless you want to test a platform’s UI) as I believe it feels too different to real money. Personally, I think you are better off investing a small amount of real money (£100) and learning with that. However, if you feel that it will work for you and give you confidence then you should certainly try it – just stick to your investment strategy/philosophy.

If you wish to use a dummy account then Trading 212 is a reasonably simple app that has this option.

Conclusion

This blog post will now have given you the information and direction you need to go ahead and invest your first £1,000. What I really want you to take away from this is that although there is a huge amount of information out there the general principles are relatively simple and therefore you are more than capable of doing this alone.

A quick recap of what we have covered in this post:

Steps you need to take before you are ready to invest your first £1,000

• Repay high-interest debt (above 8%)
• Build an emergency fund (1 to 3 months of expenses in cash)
• Repay short term debt (3 to 8%)
• Enlarge emergency fund (3 to 6 months of expenses in cash)
• More information here

7 Steps to investing your first £1,000

Step 1 – Understand your near future plans – Are you going to buy a house, get married, have children etc. in the next 3-5 years. If so it may make more sense to keep the money required for this as cash or have a low-risk investment.

Step 2 – Understand your risk tolerance – Understand that usually high reward investments also carry larger risks. Complete one of the linked risk tolerance surveys to help you understand and choose the level of risk that you are comfortable with.

Step 3 – Choosing an investment account type

• General investment account
• ISA
• LISA
• SIPP

Step 4 – Choosing an investment broker

• Vanguard
• Trading 212 & Freetrade
• Hargreaves Lansdown
• Interactive Investor

Step 5 – How to open your new account – See what information is required and watch a video of exactly how to open a Vanguard, Trading 212 or Hargreaves Lansdown ISA.

Step 6 – Which funds to choose – Understand what an index is and how the ongoing charge will affect you. You can then choose that which suits you best:

• Low to medium risk investor Vanguard LifeStrategy fund
• Higher risk investor (low input option) – Global all-cap index fund
• Higher risk investor (higher input option) – Developed large-cap index, developed small-cap index & emerging markets indexes.
• No idea of risk tolerance – Vanguard target-date fund

Step 7 – When to buy and sell

• Buy – Stick to your chosen fund (review yearly if you wish), and buy each month when you get paid. Ignore the news and don’t try to time the market.
• Sell – Only sell when you really need the money:
• You have reached your goal (e.g. investing to save for a house deposit)
• Have an emergency that cannot be covered by your emergency fund or other assets
• Reached retirement age and now need to drawdown your investments
• Have somewhere better to invest the money (business etc.)

Other points to consider before investing your first £1,000

Common traps to avoid

• Selling in a crash
• Trying to time the market
• Buying individual shares – especially if you’re not experienced and willing to put in the time and effort to research individual companies
• Investing in high fee funds
• Changing providers if they only offer a small improvement
• Believing you need a financial advisor

Using dummy accounts – Dummy accounts can be set up to allow you to become familiar with how to use a platform and actually buy and sell funds/shares. I do not generally recommend them because without ‘skin in the game’ they are treated like toys and encourage bad habits like day trading. Instead, invest a small amount of money (£100) and learn with that.

Please do not get too hung up on finding the absolute perfect fund, or planning your future to the millionth degree. If you choose a broad-based index fund like a global all-cap to invest your first £1,000 in then it is often better to just start as you can always modify and change your strategy in the future.

Please leave any questions or the investment you chose in the comment section below :).