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How to turn just £5 a month into £4,000 savings boost for later life – and more than half is free cash
The trick will see you get way more back than what you put in
SAVING money isn't easy, but there's a simple way to turn £5 a month into a £4,000 nest egg - and you'll get more than half of it for free, too.
Putting your hard-earned cash into a stocks and shares ISA rather than a savings account over a long period of time could boost your pot by thousands of pounds, analysis by Interactive Investor for The Sun shows.
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A stocks and shares ISA allows you to invest your savings into the stock market with the aim of generating returns over time, whereas a savings account is where your money is kept in cash and earns interest.
The savings experts also calculated that by investing in a stocks and shares ISA long-term, you would end up with far more money than you put in.
This is because investing in the stock market over a longer period - five years or more - will typically get you higher returns than putting the money in a cash account.
This makes it a good way to save for a long-term goal like a house deposit or retirement, while cash savings are better for short-term goals or to keep as an emergency fund.
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You can't predict what the stock market will do in the short-term, so investing for one year is no better than tossing a coin.
But over the long-term, history has shown the stock market tends to deliver bigger returns than cash.
This means there is more potential to turn just a very small regular investment into a sizeable sum.
Alice Guy, head of pensions and savings at Interactive Investor, gave an example of how investing in a stocks and shares ISA can boost your savings.
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If you invested just £5 a month in a stocks and shares Isa and achieved 5% growth every year, then after 30 years you would have £4,077.
Of this figure, only £1,800 will have come from your own contributions, while £2,277 will have come from investment growth.
This means over half of the cash is effectively free money.
If you wanted to double your monthly investment to £10 and also achieved 5% growth every year, you'd have a whopping £8,155 after 30 years.
This would be made up of £3,600 of your own contributions and of £4,555 investment growth.
If you started investing £5 a month in your twenties, you would have a decent extra pot towards your retirement savings.
Or, if you set one up for your child when they're born, they would have a good chunk towards their house deposit by the time they're 30.
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Ms Guy explained: "Investing small amounts really adds up over time and could be a nice nest egg by the time you reach retirement, for example.
"Or, it could be enough for a great holiday, a rainy-day fund to supplement your pension or a nice pot to treat your loved ones.
"Even though interest rates are currently high, investment tends to beat inflation and cash returns over time.
"Investing in a tracker fund is a simple way to buy a small piece of hundreds of successful companies and you can share in their success in the future, through investment growth.”
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How does this compare to a regular savings account?
You will typically get much higher returns putting your money in a Stocks and Shares ISA compared with a normal cash savings account.
By putting £5 a month into a savings account with 2% return - a more typical interest rate for a regular saver - you would have just £2,456 after 30 years.
This is £1,621 less than if you had invested into a stocks and shares ISA instead.
And putting £10 a month into the same account for the same period of time would see you bag a total of £4,912 - £3,243 less than if you stashed the money into a stocks and shares ISA.
What are the risks of a stocks and shares ISA?
Stocks and shares ISAs can be opened by anyone 18 or over and the maximum amount you can put into one is £20,000 per tax year.
Usually, you have to pay some fees with a Stock and Shares ISA too, so that's another thing to bear in mind.
Investing newbies need to do their research though - and you should never put money in something you don't understand.
Beginners should look for lower-risk options such as a mixed-asset funds, which invest in a variety of different areas like property, company shares and bonds.
You could also consider investing in a tracker fund, which copies the performance of a chosen stock market, such as the FTSE 100.
These often have low fees than more complex investment options.
Any money invested into a stocks and shares ISA is subject to the market changes, so there is a chance you could lose money.
However, these dips are usually short term - and remember you haven't actually lost money that is invested until you withdraw it.
Plus, investing in a company that hands out dividends and performs well you could benefit from extra cash handouts.
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If you're thinking of starting to save, you can read more about a simple trick to boost your savings and turn £180 into £44,000.
You could also try these eight saving challenges that you can start with as little as 1p - and you could stash away £7,000.
Where to find the best savings rates
Many savings accounts offer miserly rates meaning that money is generating little or no return.
However, there are ways to get your cash working hard. Sun Savers Editor Lana Clements explains how to make sure you money is getting the best interest rate.
Easy access savings accounts offer flexibility for customers, meaning they can dip in and out of cash when needed. However, the caveat is that rates can change at any time.
If you're keeping your money in an easy access account, you'll need to keep checking whether it's the best paying account for your circumstances and move if not.
Check in at least once a month to see what is happening in the market.
Check what is offered by your bank - sometimes the best rates are for customers only.
But do search the wider market as often top savings accounts are offered by lesser known providers.
Comparison sites are a good place to check for the top rates. Try Moneyfactscompare.co.uk or Moneysupermarket.
You can search by different account type. You'll usually get a better interest rate if you can lock your money away for a fixed amount of time, but it's always a good idea to keep some money in an easy access account in case of emergencies.
Don't overlook regular savings accounts often pay some of the best rates, but you'll need to commit to monthly payments. This can be a great way to get into a savings habit while earning top rates at the same time.
Do you have a money problem that needs sorting? Get in touch by emailing money-sm@news.co.uk.
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