How to set up a monthly investment plan?

How to set up a monthly investment plan

Monthly investment is when you plan to save by setting aside a certain amount of your income each month. It is an alternative to lump-sum investment, which is when you take a larger portion of your net worth, such as a bonus or funds that were sitting idle, for example, and invest it all at once.

Monthly investment can either be carried out by yourself, with the assistance of a financial advisor, or by setting up a direct-debit or standing order to transfer funds to investment funds at certain frequencies.

What are the benefits of monthly investment?

Monthly investment is recommended by financial advisors, for a number of reasons. It encourages mindfulness and discipline that, in practice, results in higher rates of saving. While all of us expect to retire eventually, many people unfortunately still do not actively prepare for retirement. So they save what is left over at the end of the month or year – if there is anything left over – rather than deciding, based on their current and prospective income how much they should spend and how much they should save. Without setting fixed targets, it’s just too tempting to tell ourselves that “life is short” and go for that new car, a slightly larger flat, an extra holiday, and so on. Just like exercise, saving can be hard enough with a routine – without one, you might be setting yourself up for failure.

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Given that most people have a monthly income, and monthly expenses, it makes sense to save at the same frequency and have a monthly investment income. The alternative would be to leave funds sitting idle until you get round to investing them, which is a waste.

Monthly investing goes hand-in-hand with what’s known as ‘dollar-cost-averaging’, which is an investment strategy that is recommended by financial advisors and even billionaire investment gurus such as Warren Buffet. The reasoning is that market prices and rates fluctuate around their long-term, or ‘fair’ values. Because financial markets are extremely complex, liquid and competitive, even for specialists, it’s very hard to time these fluctuations – the proverbial ‘buy low, sell high’. It doesn’t help that we, as individuals, are driven by emotional and informational bias.

So in the middle of a financial crisis, we might be afraid of investing, when ironically that’s when prices and rates are most attractive. Conversely, we might be bullish when everybody around us seems to be making money and the markets are at their peak. So by investing part of your income every month over your entire working life, some investments will have been made very cheaply, others will have been overpriced, but – on average – you will more likely have invested close to fair value. What’s important is to keep in mind the future value of monthly investment for future reference.

Are there any disadvantages?

Monthly investment has a few, very minor, disadvantages vs. lump-sum investment. First, it involves more fund transfers, which can be a little extra work for you – a few minutes – if they are not done automatically or directly by your advisor. If you invest once a year, that’s a single transfer, vs. 12 monthly transfers.

Second, it can also add a little work to calculating your average rate of return. With a lump-sum investment of $120,000, for example, you can look at your balance in a year and, if you see $132,000, you know you had a 10% annual return. If you had done that as 12 monthly investments of $10,000, you’d have to put the numbers into a spreadsheet or financial calculator, to calculate at what rate $10,000 invested for 12 months, plus $10,000 invested for 11 months, all the way to $10,000 invested for 1 month, would add up to your final balance. Once again, this is not a major issue – any competent financial advisor can do this calculation in a minute.

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Buy-to-let property is not normally available as a monthly investment: even if you take out a mortgage with monthly payments, you still need a significant lump-sum deposit. Increasingly, however, some specialised firms do offer monthly investment opportunities in real estate (See our article: Invest in UK property for £1,500 per month).

Am I eligible?

Monthly investment is appropriate for virtually anybody with an income, regardless of the amount. The main situation in which lump-sum investment might be more appropriate than monthly investment is if you have a significant amount of savings that are idle or available. For example: a recent bonus at work, a property that you sold, a payment you received for a one-time job, a gift, or an inheritance. In those cases, investing monthly would mean that the remainder of the funds sit idle, which is generally undesirable.

What might, nonetheless, make sense, is to still engage in ‘dollar-cost-averaging’, by investing your lump-sum into a portfolio that is initially weighted towards less risky assets (but invested, rather than idle). Then you could adjust your allocation monthly until you reach your target portfolio. In a sense this is analogous to monthly investment, but overall it would still be treated as a lump-sum investment situation. Whether you would choose to do something like this or invest according to your target allocation all at once would depend on how you saw the trade-off between the risk of investing in one go vs. the higher expected return of a higher-risk allocation over a longer period of time.

It is also worth noting that if you have outstanding debt, you are usually better-off using your savings to pay down your debt rather than invest. That is almost certainly the case if it is high-interest debt such as credit cards, overdrafts or overdue payments. In the case of mortgages, whether it makes sense to pay it down before investing in other assets depends on your specific mortgage rates and whether prepayments are allowed, and whether you can deduct the interest from tax. It is also important to ensure, before getting into longer-term investing, that you have built up a minimum emergency cash balance for unforeseen situations.

How does it work? Should I have an advisor?

Monthly investing can be carried out completely independently, with off-the-shelf products, or with the help of a financial advisor. Both options have pros and cons. The main advantage of saving independently is the possibility of lower total fees, simply because you are removing a service. Financial advisors are either paid directly or receive a commission on the investment products they advise you on. On the other hand, if you invest directly in low-fee index funds and ETFs, you can potentially remove that fee.

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There are two caveats to this. As an individual investor, a given investment fund might well charge you a certain fee regardless of whether you have an advisor, so in those cases there is no reason not to employ the advisor. Second, fees are important, but so is investment performance. If an advisor helps you to choose the most appropriate investments, and avoid mistakes, the difference in returns could easily outweigh the difference in fees.

Working with an advisor brings other benefits.

First, in the world there are tens of thousands of different investment managers, spread across dozens of major markets. All of those can be accessed from multiple jurisdictions, each with their own regulations and tax rules. Once investments are chosen, they are then affected daily by changes in politics, the economy, and so on.

Quite simply, the time and effort justified to research and keep track of all these points are usually not worthwhile for a single person’s investments. If you have your doubts, try the following exercise: set aside a certain amount of money and manage it yourself for a few months or a year. Keep track of the time you spend doing that. And at the end of the year compare your returns to those of an average fund. How much more did you make than the fund? Was it worth your time?

Second, even if you have the expertise and the time, there is the issue of bias and emotion. Could you hold your nerve during a downturn? Or avoid the temptation of piling in when everybody around you seems to be making a fortune and you are missing out? It might be wishful thinking to expect that investment that went sour to recover, but cutting losses is always painful. On the other hand, that once-in-a-lifetime opportunity might have a couple of risks that are clearer to someone on the outside. These are a few examples of situations in which an advisor could help you make the right decisions.

A good financial advisor has an independent and professional outlook, and can help guide you through your investments. In fact, even professional investors usually make sure they have someone to discuss their decisions with: in virtually all funds, ideas are discussed in committees to allow for different points of view.

How much do I need to invest?

Any amount of saving is better than no saving. If you aren’t financially comfortable enough to save much, all the more reason to carefully save what you can – you’ll need it. Off-the-shelf automatic monthly savings plans are available for amounts as low as £10 to £50, whereas working with a financial advisor, you can start with as little as $1,500 per month.

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How much you really should invest depends on your specific income, lifestyle expectations and personal goals. Take two young, single professionals on a temporary assignment abroad. One might see himself as ‘buying his freedom’, live spartanly and save the majority of his income in order to achieve financial independence and start his own business as soon as possible. The other might be having the time of his life, want to enjoy his temporary city as he might not return. He might foresee a higher income in a few years, and prefer to save as little as possible now (within reason) to maintain a higher standard of living, while committing to saving a larger percentage of his income later.

On average, though, expats commit around 20% of their monthly income to investment. They might then invest a larger proportion (in some cases, all) of their yearly bonuses to make larger lump-sum investments. According to typical retirement plans, professionals usually need to save between 25% and 50% of their total incomes (including both monthly income and yearly bonuses, depending on their stage in life and objectives) to meet their retirement goals.

To determine exactly how much you should save monthly, it is ideal to prepare a personal financial plan or retirement plan. But in any case, you have to start somewhere, so financial advisors will usually be keen to help, even if you begin with a low amount.

The power of monthly investment

Albert Einstein is famously quoted as saying “Compound interest is the most powerful force in the universe”. And nowhere is that more evident than in the case of monthly saving. Consider what happens if you save just $75 per month, every month, from when you are 20. To put that in perspective, it’s equivalent to foregoing one large coffee from a high-street chain per day, a few drinks at the pub, or a couple of dinners out.

If that is invested at a real average rate of 4% per year, you’d have just over $50,000 by the time you were 50. That’s the difference between being able to put a child through college or suggest they find a job. And, of that amount, only $27,000 will be skipped cappuccinos – the other $23,000 will have been interest. By 70, you’d have nearly $140,000. That would not be enough to retire fully on, at the standard of living of most overseas professionals, but it would be enough to buy a small investment property, cash up-front. And of that amount, only $45,000 will have been foregone spending – less than a third!

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This example can also show us something else – just how big of an impact making sure you have good rates and returns can have in the long term. If the rate were 5% rather than 4%, the pot at 70 would grow to $193,000. So even though it is only a 1 percentage-point difference – or a 25% difference in the rate – it is the difference between multiplying your savings by 3 or by over 4 times. Conversely, if the rate were 3%, you would have $103,000, only a little more than twice the initial savings.

Unfortunately, many people, even those who do make an effort to save, leave their funds sitting idle in bank accounts or in mediocre funds, and miss out on the opportunity to make their efforts pay-off up to 4x over.

Looking at more realistic savings amounts and periods, the impact on retirement can be stunning. $1,500 per month from the age of 30 to 60, at 4%, would put you just over $1 million.

Who are the main providers of retirement products?

There are thousands of different providers of investment and retirement products. Several are in the Fortune 500 and have been in the business for over 150 years. Some of the best-known of these are Old Mutual International, Friends Provident International, AXA, Zurich and Generali.

Advice on specific providers that are most appropriate for you and offer the most attractive opportunities at a given moment is something you should discuss directly with your financial advisor, or research directly if you choose to invest independently.

In general, you should look for credible and financially stable providers. A long track-record is positive, but of course there are successful and respectable newcomers too. The ideal provider for you will have a good variety of investment options with successful investment track-records, and have fees that are aligned with their degree of active management, performance and service.

Taxes and Regulation

Regulations vary from jurisdiction to jurisdiction, as do taxes, and for each jurisdiction and situation there are different alternatives for the best investment structure. For example, a UK saver might go for an ISA, which allows you to build up assets tax-free, or an SIPP – a Self-Invested Personal Pension – which has tax-relief up to a certain ‘life-time-allowance’ set each year by the government. A saver who has built up pension assets in the UK but then moved abroad might go for a QROPS – a Qualified Recognised Overseas Pension Scheme. A saver that is resident in a low-tax jurisdiction, that is not liable for UK tax at all, from when they are building up their savings, might simply go for an offshore investment fund.

So for regulatory and tax questions, it is best to discuss your specific situation with your financial advisor.

We’ve discussed why monthly investment might be right for you. It is usually highly recommended by specialists for all kinds of investors, because it encourages disciplined saving as soon as possible and mitigates the effect of market swings. It can be carried out independently or with the custom assistance of a financial advisor, which can help ensure that the amount saved and the investments chosen are appropriate. Discussions of the best providers, regulations and taxes are best had with an advisor in light of your personal situation.

Find out more: Download our Investment Guide.


Chris has 9 years’ experience as a UK pension specialist and licensed financial advisor. He specialises in helping clients make balanced financial decisions to grow their personal wealth.

Chris is licensed with Holborn Assets, an award-winning international financial advisory firm established in 1999, with 10 offices and 15,000 clients worldwide.



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