£11k is a decent sum to get started investing in the stock market. However, there’s no magic number that a potential investor must have to achieve financial freedom. Many people don’t realise it, but it’s possible to buy shares with a very small amount each month.
And regular small investments in a stock or fund, allow purchases at varying price points that can help to even-out price volatility. For example, if I set up a regular investment of £100 a month buying Rolls-Royce shares, then some months, I’ll buy them at a lower price than others. This is ‘pound-cost-averaging’ and it brings down the average price paid for the stock over time.
Nevertheless, an £11k starting pot will give my wealth-generation plan a nice launchpad. If I invest £11k and follow this up with £100 a month, I believe I can achieve a chunky retirement sum.
I’d invest £11k towards financial freedom
Regular investing is great for topping up a stock I have long-term confidence in. Both reinvesting dividends earned from stocks, and regular investing can take full advantage of the power of compound interest. This is when the interest on my stock earns interest, generating a self-fulfilling loop of increasing gains. It’s really powerful and can transform a relatively small sum exponentially. Many ordinary retail investors have become stock market millionaires thanks to the power of compound investing.
There are a few factors that make it work and determine the final sum. The effective annual interest rate being the main one. A compound interest calculator is a great way to make these calculations. If I invest £11k, followed by £100 a month, at an annual rate of 5.5% for 30 years, the final investment value would be over £144k.
If I increase the effective annual interest rate to 7.9%, the final sum would be nearly £247k. Then, if I really struck it lucky and achieved an effective annual interest rate of 12.7%, my retirement nest egg would be worth £751k.
Compound the gains exponentially with patience!
Although the interest rate matters a lot, length of time is equally important. The longer I can leave it to grow, the bigger my payoff. Each of the above scenarios left for 40 years would result in sums worth £262k, £545k and £2.5m! So, the younger I start investing, the higher my chances of achieving millionaire status in my later years. Just check out this table based on annual deposits of £1,200 and my starting sum of £11,000.
|
Year |
Yearly Interest |
Total Deposits |
Total Interest |
Balance |
|
1 |
£1,478.04 |
£12,200 |
£1,478.04 |
£13,678.04 |
|
5 |
£3,120.29 |
£17,000 |
£11,251.39 |
£28,251.39 |
|
10 |
£6,654.76 |
£23,000 |
£36,616.28 |
£59,616.28 |
|
15 |
£13,080.79 |
£29,000 |
£87,641.02 |
£116,641.02 |
|
20 |
£24,764.02 |
£35,000 |
£185,318.14 |
£220,318.14 |
|
25 |
£46,005.37 |
£41,000 |
£367,814.29 |
£408,814.29 |
|
30 |
£84,624.45 |
£47,000 |
£704,520.58 |
£751,520.58 |
|
35 |
£154,838.08 |
£53,000 |
£1,321,597.47 |
£1,374,597.47 |
|
40 |
£282,494.03 |
£59,000 |
£2,448,418.31 |
£2,507,418.31 |
As this table shows, compound interest leads to accelerating, exponential returns. So, starting with a lump sum (£11k or any other amount) and regularly investing can truly pave the way to financial freedom. With time on your side, striving for a million pounds is not as far-fetched as it may seem.
Private investors can achieve higher rates of return by carefully researching stocks and funds before buying them. Billionaires Warren Buffett and Charlie Munger both advocate for the power of compound investing. It’s a tried and tested way to achieve considerable wealth through patience and perseverance.
One final point: one of Buffett’s oft-quoted sayings is: “Buy into a company because you want to own it, not because you want the stock to go up”.
I think investors should bear this in mind when choosing stocks to buy. A strong portfolio is built on quality businesses that will go the distance.