A common complaint I hear a lot of from would be investors is how to start investing with a small amount of money. Most people don’t have a few grand laying around to put into the market and so they just sit on the sideline instead, thinking that $100 won’t matter in the long run.
If this describes your situation, I have great news for you – this post is going to show you just how easy it is to start investing with a small amount of money.
You don’t need thousands to get started down the path of financial freedom. In fact, in one case, you can start out with just $10!
How To Start Investing With A Small Amount of Money
Years ago, if you didn’t have a few grand laying around collecting dust, your investment options were slim to none. But thanks to technology and some government regulation, you can get started investing with a few dollars. Below are 4 of my favorite ways.
#1. Invest In Your 401k Plan
Many of us that work are covered by a 401k plan. This is the easiest way to get started investing in the stock market with a small amount of money. In fact, it is the only way you can start doing so with less than $10. How? You decide how much of a percentage of your salary you save in your 401k plan. If you make $20,000 and save just 1%, then you are saving $3.85 per paycheck if you get paid weekly.
Now, don’t make the mistake of thinking that $3.85 won’t turn into anything big, because it will – if you stick with it. Read my compound interest post for proof of how the math works. But here is my story.
When I started out working, I was making $25,000 a year. I was investing 5% each paycheck in my 401k plan. Since I was paid biweekly, I was investing about $48 per paycheck. Nothing huge and in fact, I even questioned if it was even worth saving for retirement.
As time went on, compounding started to work its magic and grow my account value. But there was another factor at play too. I was getting raises on a regular basis.
Fast forward 5 years and I was making $40,000 a year. Still saving 5% of my paycheck, I was now investing over $75 biweekly. This along with compound interest kept my account balance growing. At this point I began to increase the amount I was saving as I was excited to watch my account balance grow.
This example doesn’t include the fact that my company also offered a match. They were investing an additional $10-$20 per paycheck for me.
If you want to get started investing, this is by far the easiest first step you can take. Just start with something and then make sure you increase the amount you save each year, not just through raise but through increasing your contribution amount too.
#2. Look Into Mutual Funds
If you aren’t covered by a 401k plan at work, or you want to invest somewhere else in addition to your 401k plan, you can look into mutual funds. While many mutual funds have large account minimums, there are handfuls that have much lower minimums so that first time investors can invest with a small amount of money.
Case in point are Schwab Funds. To buy into their mutual funds it will cost you $100. Even better, you can make additional purchases with as little as $1. That isn’t a typo. Schwab has a large variety of funds, and many of their index based funds have good returns and low expense ratios. When I started to invest outside of my 401k plan, this is where I went since it allowed me to invest with a small amount of money.
In addition to their mutual funds, you can choose to invest in Schwab ETFs. There is no commission and you can buy just 1 share at a time. They even have a large collection of other no fee ETFs you can trade for free. You can read all about Schwab in my review. Even better, if you open an account, they will give you $100 for free just by using my referral code.
One other thing to look at with mutual funds is automatic investment plans. Many fund companies will waive the normal minimum initial investment if you sign up for a monthly investment each month.
In this case, the mutual fund will electronically transfer money from your linked checking account to the fund on the day of the month you chose. This can be done with as little as $50 and there is no charge. Be sure to inquire with the mutual fund company to see if they will waive the minimum for you in exchange for a monthly automatic investment.
#3. Use A Robo-Advisor
Your next option for investing with a small amount of money is going with a robo-advisor. In this class of investing firms, I like and use Betterment. To understand why they are called robo-advisors, you need to understand how they operate.
In basic terms, you open a free account and then choose a goal. This can be to buy a house, fund your retirement, save for your kid’s college or just plain investing. Based on your goal and the time until you reach your goal, Betterment will assign a portfolio with an asset allocation for you. (Note that you can change the allocation if you would like, but there is no requirement to do so.)
Once you have everything picked out, you link your checking account and the amount you want to invest each month and you are done. Betterment will invest the money each month, reinvest any dividends, rebalance your portfolio and perform any tax-loss harvesting for you.
This is why they are considered a robo-advisor. Everything is done for you, like a robot. They take out emotion from investing, which is the main reason most investors fail. If you want to learn more about Betterment, read my full review. If you decide they are right for you, they will waive fees for the first 6 months.
#4. Direct Stock Purchase Plans
The downside of investing in stocks is twofold. First, you need enough money to buy a good number of shares and you can only buy whole shares. The second issue is commissions. In order to buy a stock, a broker has to place the order for you. They charge a fee for this. Even if you chose a discount broker with a low trade fee, you are still paying a huge percentage of your money in fees.
For example, if you are charged $7 per trade, and you are buying a share of stock each month with $50, you are paying 14% commission!! A better solution is to buy stock directly from the company themselves.
Many large companies like General Electric, Home Depot, and Kellogg have direct stock investment plans. The way they work is simple.
You open an account with the company’s transfer agent. The minimum initial investment varies from company to company, and could be $500. You will pay a “first-time” purchase fee, usually $5, then will pay roughly $2.50 for each purchase you make thereafter. Most charge a fee of $10 when you want to sell as well.
There are many companies however who don’t charge a fee for additional purchases as long as you set up a recurring purchase. The great part is that you can buy fractional shares. So, if you have $50 to invest, you could buy 2.25 shares of a stock.
You can find a ton of companies by searching through a popular transfer agent, Computershare. If you can’t find your favorite company there, you can go to the investor relations section on the website of the company you want to invest in and see if they have a plan and a link to join.
#5. Bonus: A Few Other Options
There are a few other options that you can explore. In no particular order:
- Loyal3: it’s a new investing platform that allows you to invest as little as $10 and they don’t charge a fee. I haven’t used them, but have heard good things.
- Motif Investing: this also is a new investing platform. They allow you to invest in “motifs” which are essentially customized baskets of stocks for just $250 to start. You can even create your own motif. What is great about Motif is that they charge one commission per trade which means you are trading multiple stocks for one low fee. If you sign up with them, they will give you $150!
Which Path To Choose?
The choice is really up to you. I personally go with Schwab because of the low cost investment choices they offer. My suggestion to you is to look at all of the choices and then narrow them down based on what you are looking for. Of course, you have to take into account any investment fees you will be paying.
However, if you are new to the investing world, a site like Betterment is a perfect fit. They take care of the complications of putting together a well-diversified portfolio as well as investing in low cost investments, which is the key to becoming a stock market millionaire.
This is not to say stocks are not good. They are and are a great way to earn passive income. The problem is that there are trading fees associated with buying stocks and I would rather not pay that commission.
At the end of the day, you have options when it comes to investing with a small amount of money. The easiest place to start is with your 401k plan at work and then do some research to see which of the other options will best meet your needs.
But whatever you do, don’t fall into the trap of thinking a few dollars here and there won’t matter. Thanks to the power of time, your money will grow. But it will only grow if you actually take that first step and start investing. It won’t become a million dollars tomorrow, but in time, you will be amazed at how much your investments grow in value.