Direct Debit – A clever way to invest

Charlie Hutchence, Investment Writer

Last Updated: 16 May 2023

When helping people to save money, experts often ask:

• Do you use all those streaming services?

• Do you need a subscription for a magazine you don’t read?

• Are you paying for insurance you don’t need on an item you no longer own?

A review of your Direct Debits and subscriptions could certainly uncover unnecessary spending. And reasons to cancel some of them.

But if you’re prepared to wait for 5 years or more, there is a Direct Debit you can set up to benefit you. And you’d be putting money aside rather than spending it.

You could improve your financial future.

Here’s why you could consider setting up a Direct Debit to start investing. Rather than cancelling one.

We hope you find this article helpful, but it isn’t personal advice. ISA and tax rules can change, and any benefits will depend on your circumstances. All investments can go up and down in value. Although there’s the potential for gains, it’s also possible to get back less than you put in. If you’re not sure what’s right for you, ask for financial advice.

Why you could consider investing

Investing is for those long-term goals that are longer than 5 years away. We’d suggest holding cash for anything sooner. There’s more risk, which is why a longer time is necessary to account for the ups and downs. However, there’s the chance for higher rewards than cash.

Inflation and rising costs reduce the spending power of your money. Investing offers the potential to achieve returns greater than the interest rates available on cash and inflation.

But unlike the security offered by cash, there’s no guarantee of making money and you could get back less than you put in.

We’d also suggest holding enough cash to cover emergencies before you start investing. Typically, this might be between 3-6 months of income.

Should I save or invest?

A little and often

For many people, the ISA allowance and the tax year end simply don’t matter. And why should it if you’re not going to use the full £20,000 allowance? Not everyone has that much money just lying around.

But you have to start somewhere.

A Direct Debit allows you to put in what you can on a monthly basis. And it means you can put it in bit by bit rather than waiting to build a lump sum to put in all at once.

Over time it could build up to something quite substantial.

Assuming a growth rate of 5% a year and average investment charges of 1.25%, we’ve worked out in the table below how much a monthly investment could be worth in the future. Your own charges could be lower or higher, depending on the investments you hold and we haven’t factored in inflation.

This is an example only, actual returns will vary depending on the investments you choose. These calculations don’t take into account taxes. The value of investments can go down as well as up in value so you could get back less than invested.

Try our Direct Debit calculator

It helps remove emotion from investing

Setting aside money automatically makes it easier to get into good habits. You won’t forget to invest, because it happens at the same time every month.

Leaving the money alone can be hard, and takes patience, but the results can really pay off over time.

If you invest by Direct Debit you don’t have to worry about when the right time to invest is. You won’t be trying to time the market, concerned about whether now is the right time to buy.

Investing by Direct Debit means that your money is taken from your bank account towards the start of the month. We take the money on the 7th or next available working day.

Any money you instruct will be invested on the 10th day of the month or next available working day.

You can benefit from pound-cost averaging

Pound-cost averaging is a powerful way to help smooth out the ups and downs of the market.

When you invest monthly, you buy more units or shares in an investment at lower prices if the value falls, helping you achieve better returns. However, if investment prices continue to rise, you’ll buy fewer units or shares at higher prices.

By investing at many different times, you avoid the risk of investing all your money when the market is at its highest. You should still regularly review your investments to be sure they are right for your objectives and attitude to risk.

Want to get started?

With HL you can invest from as little as £25 a month per investment into our Fund and Share Account, Stocks and Shares ISA, Lifetime ISA or SIPP. Find out more about how to set one up.

Learn more about setting up a Direct Debit