Ask someone to describe a typical investor, and chances are they’ll paint a picture of someone with plenty of money to throw around. A rough sketch of someone slightly resembling Mr Monopoly, for example.
But investing doesn’t have to be just for the incredibly wealthy.
As technology evolves, many traditional barriers to investing are gradually being broken down. It‘s created an opportunity for those who don’t have the funds to afford a financial adviser to put their money to work.
Peer-to-peer lending (P2P) has been one of the driving forces behind this movement – transforming an age-old industry with a modern, efficient solution that aims to give both borrowers and investors a better deal.
It’s also helped change the way financial services firms talk to investors, bypassing the stuffy language and helping make investing clear and simple to those without economics degrees.
Now, whether you have £10, £100 or a £1,000 set aside, getting started has probably never been easier. The gains may be small to begin with, but, over time, it’s possible to build up a significant nest egg. And, whether you’re investing for a house deposit or preparing for retirement, putting money aside early couldn’t be more important.
So, how could peer-to-peer lending help?
Peer-to-peer lending allows those happy to put their money at risk to target inflation-beating rates by investing in loans. Crucially, a number of P2P platforms are free to use. It means you don’t have to pay any fees on what returns you are able to make.
And many investors – not just those new to the game, but experienced ones, as well – will find the ups and downs of the stock market too unnerving. P2P is a way to put your money to work without having to stomach the rollercoaster ride that can be investing in equities. But your money will still be at risk, of course.
It’s not only those with plenty of time on their hands that can benefit from P2P either. While on some platforms you can pick and choose each loan you invest in yourself, not everyone has the time to do all the proper due diligence that comes with it. Luckily, there are providers out there that will do this for you – automatically setting you up with a managed portfolio of loans to try and split the risk.
Compound, compound, compound…
Ok. So maybe you’ve decided that peer-to-peer lending is the way to go. But how can you really start making the most of it?
One of the most effective ways to grow any investment pot is by re-investing your returns. Doing so allows you to earn interest on your interest – a process called compounding, which Albert Einstein once referred to as the ‘eighth wonder of the world’. It allows your investment to develop at a much faster rate, and you might be surprised at the effect it can have.
For example, let’s say your initial investment of £1,000 is earning an annual 4% rate. By choosing to automatically reinvest your monthly interest, that £1,000 could have earned nearly £500 after ten years. That’s £100 you wouldn’t have had, had you decided to withdraw the interest instead.
And imagine if you decided to make an additional contribution of just £50 a month from your salary. By the end of that ten-year period you could have earned £1,878 in interest – with a total pot of £8,878.
It’s important to remember that any investment puts your money at risk – it’s not the same as keeping your money in a savings account, and peer-to-peer lending isn’t covered by the Financial Services Compensation Scheme. There’s a risk that you could get back less than you initially put in.
So, make sure you are comfortable with the level of risk you’re taking. You should always keep any money that you need instant, guaranteed access to in a separate savings account – a rainy day fund – just in case anything should go wrong.
Getting started is the hardest part
It’s a bit of a cliché, but putting those first pounds aside is often the most difficult bit. However, investing is for the long-term. The rewards will probably seem small to begin with, but setting out on your investment journey now, even in just a small way, could make a huge difference down the line.
And now, thanks to the likes of peer-to-peer lending, you can get started even if you’ve only got a few quid available to invest. Just remember, investing places your capital at risk – there’s a chance you could get back less than you initially put in.