I’m currently coaching a client regarding financial freedom and building a freedom fund. She understands all the principles of FIRE (financial independence retire early) the 4 per cent rule, budgeting, compound interest and what stocks and shares are but she had one barrier to starting the whole journey. And that was ‘How do I buy an index fund?’
It was then that I realised that sometimes its just not having the knowledge of the more practical first steps that is holding people back from starting their financial freedom journey.
So this post is to try and give some pointers on where to start. However I am not a financial adviser so I don’t give individual advice and I’m based in the UK, so although the other posts on this website can hopefully be appreciated by any one from any country, this one is definitely UK skewed.
Ok where do I start?
Well put simply, in order to start investing you need these 3 things –
- The index fund or shares that you want to buy (the investments)
- An account that you will put your investments in (eg a stocks and shares ISA)
- A platform that will hold your account and the investments that are inside it.
In the UK a very tax efficient way of investing is in a stocks and shares ISA. This is a type of account that you will put your investments into. This is tax free so you wont be taxed on the growth of your investments or any dividends received. You can invest a maximum of £20k each year. However, if you are currently investing in a cash ISA you can’t also invest in a stocks and shares ISA as well. However these rules could change in future.
There are lots of platforms that will hold the stocks and shares ISA such as Vanguard, Interactive Investor, Hargreaves Lansdown and many others. They all have different fees and restrictions so you will need to do your homework and see which will work best for you.
Once you have your chosen account in the platform of your choice e.g. a stocks and shares ISA on the Vanguard platform, you can then choose which fund or shares to invest in. As previously discussed in investing for beginners, many proponents of FIRE choose to invest in a global index fund. These are low cost, diverse as you are buying lots of different companies throughout the world and simple to buy. There are lots of different types depending on which platform you use, but they are easy to search through on the platform. You can also use morningstar to check the details and performance of your fund to make a more informed decision.
Often you can start investing with as little as £50 to£100 a month into the fund. You can start a regular direct debit into it each month and then just let compound interest do its thing over time. Once you have the hang of it and as you trim down expenses and increase income you can then choose to increase your contributions each month.
Hopefully this gives you some basics and pointers as to where to start when looking to buy an index fund. Do make sure you do your own research though to work out what is best for you. There is a wealth of information out there about investing so please use this post as a starting point and let me know how you get on.
Semi-Retire FIRE 