A common myth about investing is that you need a big bank account just to get started. In reality, building a solid portfolio can start with a few thousand – or even a few hundred – dollars. Here's some specific advice, ranked by the amount of money you may have available to start your investments. This article also discusses some smart moves low rollers can make to get a savings and investment program going.
Key learning points
- Regularly set aside a certain amount to save.
- Look into savings apps that round up your purchases and save the spare change.
- Pay off the high-interest debts first.
- Take advantage of pension plans.
- Think about the level of risk you are comfortable with and how this changes over time.
- Trade up for better choices as your investment pot grows.
4 strategies to get started
Whether you plan to invest a lot or a little, make safe bets or risky gambles, these steps can help you get your plans on track.
Auto save
Caring to set aside a certain amount each month will pay off in the long run. If you don't have the willpower or organization to do it yourself, help is available through smartphone and computer apps.
The apps that make saving the least painful are the ones that round your purchases and other transactions to the nearest dollar and set aside the "savings." Acorns, Qapital and Chime all offer ways to complete transactions on your credit or debit card and return the money to you in fuel-efficient vehicles.
For example, Acorns puts the money in one of the many low-cost Exchange Traded Funds (ETFs); these are good vehicles for small savers.Qapital adds the ability to automatically transfer money based on the rules you choose. The money in a Qapital account insured by the Federal Deposit Insurance Corporation is held with one of its banking partners.Chime, an online bank and app, offers, among other things, a savings account that automatically deposits a percentage of every paycheck you deposit.
In addition to using these apps, you can also ask your bank about its own apps and other ways to automatically transfer money from non-savings accounts to accounts that are better suited for savings and investments.
Manage your debts
Before you start saving, analyze what it will cost to pay off your debts and consider how quickly you can get rid of them. After all, high-interest credit cards have interest rates of 20% or more, and some student loans have interest rates of more than 10%. These rates are higher than the average annual return of approximately 9.2% that the US stock market has returned over time.
If you have a lot of high-interest debt, it makes more sense to pay off at least some of it before investing. While you can't predict the exact return on most of your investments, you can rest assured that paying off debt a year early at 20% interest is just as good as getting a 20% return on your money.
Then, avoid high-interest debt by building an emergency fund.
“The first and best place to start investing is to make sure you have enough savings for emergencies,” says Jeremy Keil, a certified financial planner based in New Berlin, Wisconsin. “Half of all Americans have less than $1,000 saved, and they are just one medical bill, credit card or car bill away from major financial trouble.”
Always contribute enough money to your 401(k) to qualify for your employer's matching contribution: it's free money. Even if your employer doesn't match your 401(k) contributions, a plan is still a good deal.
Think about your pension
A major goal of saving and investing, even at a young age, should be to ensure that you have enough money after you stop working. A priority would be to take advantage of the incentives that governments and employers adhere to to encourage retirement savings. If your company has a401(k)pension plan, don't forget it. This is especially the case if your company funds (part of) your contributions.
For example, if you have an income of $50,000 and contribute $3,000, or 6% of your income, to your 401(k) plan, your employer can match that by contributing another $3,000. A less generous employer may contribute as little as 3%, adding $1,500 to your $3,000 contribution. You always want to put enough into your 401(k) to get the total match amount from your employer. Not doing this is essentially wasting money.
Additionally, 401(k)s and other retirement vehicles are good investments because of their favorable tax treatment. Many of these allow you to contribute kroner pre-tax, reducing your tax burden in the years you contribute.For other investment vehicles, such as Roth 401(k)s and Individual Retirement Accounts (IRAs), you contribute after-tax income but withdraw the money tax-free, lowering your tax burden in the year you withdraw your money.
“Once your emergency fund is set up, consider a Roth IRA, which can help you save for retirement and grow your income tax-free,” says Keil. "Generally you want one"target date'fund that gives you a mix of investments based on when you retire, or an 'allocation fund' that gives you a mix of investments based on the risk you are willing to take.'
Keep in mind that as your money has grown over the years, there will be much more than you originally contributed, so the tax-free withdrawals will be even more beneficial. Whether you use a target date or an allocation fund, earnings accumulate in the account tax-free.
Invest your tax refund
If you're having a hard time saving money during the year, consider setting aside all or part of your tax refund as a way to start investing. It's one of the few times of the year when you're likely to get a windfall that you weren't already planning to spend on expenses.
Whatever product you invest in, it's important that you understand the associated costs (and do your best to keep them as low as possible).
Recommendations per investment amount
A few general points are worth highlighting first. Regardless of your net worth, it's important to keep your investment costs to a minimum, whether it's a checking account, mutual fund or other financial product.
This is especially the case wheninvesting with a limited budgetbecause fixed costs take up a significant portion of your savings. A $100 annual fee on a $1 million account is trivial, but a $100 fee on a $5,000 account is a financial blow. Choose fees carefully when putting your money in an account, especially if you're investing on a budget.
You should also weigh the likely return on your investments against the level of risk you are comfortable with, and ensure this is appropriate for your age. In general, your portfolio should become less and less risky as you approach retirement.
How to invest $500
It may seem like a small amount to work with, but $500 can go further than you think when starting an investment portfolio. If you prefer to play it safe, park your money in a certificate of deposit (CD) from a bank or other lender, or use it to buy short-term government bonds, which you can buy through an online broker. The growth potential with both options is limited, although it increases as interest rates rise, but the risks are virtually nil. It's a way to make a little bit of your money until your nest egg grows and more options become available.
For those comfortable with a little more risk, there are many options available, even for small investors, that promise greater returns than CDs or T-bills. One is onedividend reinvestment plan. You buy shares and your dividends are automatically used to buy additional or even fractional shares. This is an excellent choice for small investors because the shares are purchased at a discount without paying a sales commission to a broker. Buying a single share of a company's stock can get you started.
How to invest in ETFs
Another option for starting small is an ETF, most of which require no minimum investment. Unlike most mutual funds, ETFs typically have apassive managementstructure, which means lower operating costs. Although transaction costs have been an issue when trading ETFs, many discount brokers now offer commission-free trades on ETFs, reducing the costs of buying and selling these funds. By choosing a broker that offers commission-free ETF trading, you can invest without worrying about additional transaction fees. If your broker charges fees for trades, consolidating your investments into fewer, larger trades can help reduce these costs.
How to invest in peer-to-peer lending and crowdfunding
The biggest risk comes from investing in peer-to-peer lending.Crowdfundingconnects investors and entrepreneurs trying to finance new ventures. As the loans are repaid, investors receive a portion of interest in proportion to the amount they invested. Some crowdfunding platforms have low minimum requirements to open an account, such as $25 for Prosper, but others may require much more money.
Crowdfunding offers high risk, as many new ventures fail, but also offers the prospect of increased revenue. Generally, annual returns are between 5% and 8%, but they can reach 30% or more for investors who are willing to take a big risk or are simply lucky enough to back a particularly profitable newcomer.
How to invest $1,000
If you're saving for retirement or want to buy a home that will be available in a few years, look for a low-cost mutual fund with a relatively low minimum investment, typically around $1,000. With this type of fund you choose the target date yourself. Investments in the fund automatically adjust over time, and the overall mix changes from riskier to safer as your target date approaches.
This is important because when you're just starting out, you have time. You can make riskier investments that can yield higher returns. But as you approach your target date, especially if it concerns retirement, you'll want to protect yourself from sudden losses that derail your plans.
With $1,000, you can also consider buying individual stocks, which may carry higher risk but can generate higher returns. Investing in individual stocks that pay dividends is a smart strategy. You have the choice to receive the dividend in cash or reinvest it in additional shares.
Real estate crowdfunding
Another option if you are interested in crowdfunding is tocrowdfunding of a real estate investment. This involves working with an organization that takes money from many investors and uses it to purchase or upgrade real estate.
In addition to allowing you to invest in real estate with relatively small amounts of money, it also gives you access to investments that go beyond the typical single-family or multi-family home. Crowdfunded real estate investments can include commercial properties, large apartment buildings, hotels or industrial buildings.
How to Invest $3,000
This level of investment gives access to additional options, including various investment funds. While some funds require a minimum investment of $1,000 or less, a larger amount is more common, such as the $3,000 that Vanguard requires for most funds.
The long list of remedies can be daunting. But consider one firstindex funds, a type of mutual fund that tracks a specific market index, such as the S&P 500 or the Dow Jones Industrials, and offers relatively low expenses. Like ETFs, index funds are passively managed, which means lower interest ratescost ratioThe goal of an index fund is to at least match the performance of the index. It also gives you broad exposure to multiple asset classes.
How to Invest $5,000
The options expand to the $5,000 level. You have several options for mutual funds, individual company stocks, index funds, IRAs, and for real estate investing. While $5,000 isn't enough to buy real estate or even make a down payment, it is enough to acquire a stake in real estate through other means.
The first option is to put money into a real estate investment trust (REIT). This is a company that owns a group of properties or mortgages that generate a continuous stream of income. As a REIT investor, you are entitled to a share of the income from these underlying properties. REITs are required by law to distribute 90% of their income to investors in the form of dividends each year. REITs can be traded or non-traded, with the latter having higher initial fees.
Another option is real estate crowdfunding. Thatbest real estate crowdfunding platformscan now accept investments from both accredited and non-accredited investors.Many platforms set the minimum investment for entering into private real estate transactions at $5,000.
Investors can also choose fromdebt and equity investmentsin commercial and residential real estate, depending on the platform. Returns on debt investments range from 8% to 12% per year. Stock investments can provide higher returns as property values increase. Keep in mind that these types of investments involve more risks than more traditional investments.
What is the best investment for someone on a budget?
- There is no single best investment for someone who doesn't have a lot of money to get started. As with any investment, you need to consider your risk tolerance and your goals. Try to choose an investment that offers a combination of risk and return that suits your risk tolerance.
Why do many investments have minimum investment requirements?
Minimum investment amountvary considerably depending on the investment involved, but are generally used to ensure that a large number of small or short-term transactions do not affect the day-to-day management of a mutual fund or other investment.
Is it better to invest or pay off debt?
When you decide to invest or pay off debt, you should compare the debt's interest rate to your expected rate of return. Paying off debt makes more sense if the expected return on the investment is less than or equal to the interest on the debt.
What is the minimum amount I can start investing with?
Some services allow you to start investing with very small amounts. For example,Jerkyou can start with as little as $5. You can probably find a service that will allow you to start investing with the amount you have available.
In short
Investing can be quite complicated, but the basics are simple. Maximize what you save and invest and your employer contributions. Minimize taxes and duties. Make smart choices with your limited resources. That said, building a portfolio can quickly become complex, especially when you consider your debt, specific tax incentives and obligations that may apply, and so on, let alone balancing the risks and potential returns from various investment opportunities. Consider seeking help.
Given technology and intense competition for your dollars, there are more resources available than ever. Options includerobo-advisors, virtual assistants that can help you build a balanced portfolio at a low cost, and fee-only financial advisors who don't rely on income from commissions on the products they sell. The hardest part of investing is getting started, but the sooner you do it, the more you can accumulate. It's that simple.
