One of the FAQs I get in my DMs is:

"How do I build an investment portfolio when I don't earn much?"

Here's my answer:

For context, I started building an investment portfolio in the UK when I was earning £12.30p/h as a research assistant at the University

(I was studying for a Post Grad degree)

The first time I saw my tax deductions, I was caught unawares and almost shed tears because the calculation in my head did not match the calculation on paper

I shared my misery with my Tax Prof (Ann Mumford) and that was the beginning of my real life tax education

She was a foreigner like me (American living in the the UK) and gave me invaluable advice:

anytime you want to move countries, read the history and tax laws of the country. It gives you insight on ingrained incentives and allowances

Starting from the absolute bottom with the aim to reduce my tax liability has helped me identify opportunities as my income grew

(and also know when to cap income from different sources so it does not affect my tax bill)

This advice is mostly relevant to people who are resident in the UK for tax purposes.

If you are resident in other tax jurisdictions, research equivalent tax advantages

When you identify a legal opportunity to reduce your taxable income, take it. Structure all your affairs in such a way that you pay the least amount due

Before I go into this whole investment spiel, remember the rule of thumb -

"Past performance is not a reliable indicator of future results."

1. What are your investment goals? These change often so always have checkpoint for assessing and reviewing if the goals set are still viable or need to change.

Different goals affect your investment portfolio strategy

For example, investing strategies aimed towards retirement, marriage, children's education or buying property will be different from emergency funds, travel and professional improvement

As a single woman, most of my disposable income goes into maximising my ISA & Pension investments.

My main aim for increasing my income is to maximise the £60k tax free allowance these 2 types of investments give offer.

My investment goal ATM is to build a nice retirement pot

To learn more about setting investment goals, read https://www.unbiased.co.uk/news/financial-adviser/Top-10-investment-goals by Nick Green

2. What is right for you?

Investments are a trade off between risk and reward over a period of time.

So be as realistic as possible with yourself.

What are you ready to risk? What is the reward?

How long are you investing for?

Will this affect you when you have a life crisis?

How much is investing costing you in fees and tax?

Write it all down.

To help with this, read https://www.moneyadviceservice.org.uk/en/articles/top-tips-for-choosing-investments by @YourMoneyAdvice

3. Shares or Bonds?

With shares, you own a piece in the company and share in its profit or loss.

With bonds, you are buying a debt with a fixed interest rate over a period of time (usually 2-30 years)

Just like you won't eat only proteins for the rest of your life, a healthy portfolio contains a balanced diet of shares and bonds

4. Spread risks: Your portfolio should be as varied as your diet.

First, you start with milk as a baby and then incorporate new things as you grow

One minute you are eating Ramen because that's all you can afford, the next you are eating sashimi from a Michelin star restaurant.

It's a similar approach with investments.

Make the small investments firsts and grow to make riskier ones

5. Do you want to invest actively or passively?

If you are just starting out and your risk appetite is not high, focus on consistently investing in passive funds

Whatever you do, make sure you choose lower-cost funds that will allow you to keep a huge percentage of your returns.

I believe that investing in passive funds pays off in the long term

6. Manage your investment cost by understanding how much you are charged for investing on a platform and how much compound interest your investments will yield

Now that I’ve set some sort of context, here’s my step-by-step guide for building an investment portfolio when you don’t earn much:

1. Open an account with @Vanguard_UK.

I am an unpaid advocate of everything Vanguard and you can read more about my love for them here https://twitter.com/toyinldr/status/1264958049124564994?s=21

Now that you have opened an account with Vanguard, the first thing you notice is that there are 79 funds to invest in.

Each fund is explained in 22 pages and suddenly, you feel your throat tighten.

Don't be alarmed, I'll guide you to the relevant ones

2. Choose the "Stocks and Shares ISA account" on Vanguard specifically to invest anything up to £20k in this tax year.

I know I said I will guide you if you don't earn much but knowing the maximum you can put in a tax free investment wrapper is important for future purposes

As weird and counterintuitive as it sounds, the government who seems to tax every penny out of you actually encourages investments and savings.

One of the best ways to take advantage of this ‘benevolence’ is to open an ISA account. I wrote more about this here https://twitter.com/toyinldr/status/1264951330675863552

3. Congratulations! You now have a "Stocks and Shares ISA account" on Vanguard.

Now, choose any of the Life Strategy funds.

If you can’t make up your mind, choose the middle one

4. Set up a Direct Debit with a minimum of £50 to go into that account.

For context, doing this consistently over 5 years, your portfolio will be worth ~£3k at ~6.5% p/a.

Remember, "Past performance is not a reliable indicator of future results."

5. Now you have completed all the steps necessary to invest a minimum of £50 per month in a tax free investment wrapper.

Whoop whoop!

Rule of thumb:

Whatever profits you make from an invest in an ISA is tax free (no income or Capital Gains Tax applies)

Now that you have created a Stocks and Shares ISA with Vanguard, if you put in £1k p/a for 5 years with a 6% return p/a (after charges), your portfolio will be worth £7,157

This is definitely more than you'd earn by putting £1k in a savings account every year. Also, you don't have to declare ISA investments in your tax returns. #Winning