While investing isnt right for everyone, it is a tried-and-true method of building wealth over time. Many people have the mistaken impression that investing is only for the super-rich, but that isnt the case. Even if you only have a small amount to get started, you can absolutely invest. Follow along with these seven tips for investing when you dont have much money to start.
Start Small With Investing Apps
Some brokerage accounts require a $100 minimum balance or more to get started, but modern investing apps let you open an account with no minimum. An app like Acorns let you start investing with only $5.
App Robinhood is a brokerage with no trade fees or commissions so you can buy and sell stocks in small lots without losing a large portion of your investment to fees. Also, some larger brokerage firms allow you to open retirement accounts with a lower minimum balance than a standard investment account as long as you set up an automatic recurring deposit.
Consider Index Funds Over Stocks
One of the keys to investment success is diversification. A well-diversified portfolio is more resilient against losses than one with just a few assets. But when you only have a small amount to invest, it can be tough to diversify. It doesnt make sense to buy one share in many companies. Instead, consider an index fund that gives you diversity in one market trade.
For example, an S&P 500 index fund gives you a slice of ownership in 500 of the largest public companies in the United States. If one stock in that group of 500 goes down, it wont impact your overall investments all that much. If you only own one stock and it has a poor quarter, you could see your entire portfolio take a big hit. Low-cost index funds are the cheapest route to instant investment diversification.
Focus on the Fees
If you do decide to buy index funds, ETFs (exchange-traded funds) or mutual funds in your portfolio, pay close attention to the fees. Here are some of the highest cost ETFs available today. Every one of these exchange-traded funds charges over 1 percent per year in fees. According to Consumer Reports, some S&P 500 index funds charge as much as 10 times what others charge for essentially the same thing.
Index funds provide better diversification at the same time as generally lower fees. For example, the USA Mutuals Vice Investor fund puts investor funds into a small pool of tobacco, casino, and other stocks. The fund charges 1.49 percent in fees. On the other hand, the Vanguard S&P 500 ETF charges just 0.04 percent in fees. The Vice fund charges more than 37 times higher fees. Over time, that adds up to a huge cost for your portfolio.
Create a Recurring Investment
If you get paid every other week and can scrape together just $10 per paycheck, you would have $260 at the end of the year. If you invest the same $10 per pay period for five years, that is $1,300. Even small amounts add up over time.
If you can invest small amounts consistently over time, it adds up quickly. Build good habits and set up a recurring, automatic investment every payday to get the best results. If you can afford it, increase your automatic investment by a small amount every few months or every year to get even more power from your automated investment plan.
Take Advantage of the Power of Compounding
Investing $10 per paycheck (assuming 26 weekly pay periods) for five years adds up to $1,300. But what happens when you invest those dollars rather than save them in a low-interest bank account? Your $1,300 could become a lot more.
The power of compound interest can turn your small investments into a valuable nest egg. According to the compound interest calculator, if you invest that $10 per paycheck and earn a 10 percent return, you will have $1,548 after five years, that is about $250 in investment gains over the $1,300 you stashed away. Follow the same pattern for 10 years and youll have $4,096. That is a $1,496 gain, more than your entire first five year contributions combined. Of course, these returns are not guaranteed, but over the last several decades the S&P 500 has returned an average of about 10 percent per year.
Reinvest Your Investment Gains
Some stocks go beyond just increasing in value and pay you a small dividend every quarter. For example, if you buy stock in McDonalds, the company will pay you about $1 per share four times per year, or 2.59 percent per year based on the stock price as of this writing. As an investor, you can choose to take that $1 and spend it, or you can automatically reinvest it in more shares of McDonalds.
Reinvesting your dividends is a smart way to grow your portfolio even faster. If you can buy a little more stock in McDonalds, or whatever security pays your investment, you will get more shares that can continue to increase in value in the future. This gives you double the power to grow your money compared to taking those dividends for other uses.
Improve Your Investing IQ
Whether you are investing just a few dollars or a few million, there is always more you can learn and understand about investments and the stock market. Whether you want to read blog posts like this, listen to investing podcasts, or pick up a book such as The Intelligent Investor by investing legend Benjamin Graham, there is a virtually unlimited opportunity to boost your investing IQ.
As your portfolio grows, you will find yourself with new opportunities to invest in riskier assets. Learning about investing can help you manage your risk while focusing on the right investments for your personal finance goals. You can never know too much about investing.
Even Warren Buffett Started Somewhere
Warren Buffett is often regarded as the most successful investor of all time. His personal net worth is just shy of $90 billion. But even he started somewhere. At age 15, his net worth was just $6,000. While that was a huge amount for someone that age, he earned it all himself on a newspaper route. Over the decades, he turned his $6,000 into billions.
While most of us will never become billionaires, you dont have to be rich to get started. Even with just $5, you can start investing today.