Introduction

 

 

Investing can seem intimidating, especially if you don’t have a lot of money to spare. However, you don’t need thousands of dollars to get started investing. With some planning and discipline, How to start investing with little money is completely doable. Here are some tips for getting started:

Set investing goals

Before you start investing, think about what you want to achieve. How to start investing with little money goals could include:

• Saving for retirement
• Building an emergency fund
• Saving for a major purchase like a house or car
• Paying off debt

Having clear goals will help guide your investment strategy. It will also motivate you to keep adding money to your investments over time.

Know your risk tolerance

All investing involves some degree of risk. However, some investments are riskier than others. Your risk tolerance is your ability to endure potential losses in order to achieve investment returns.

When How to start investing with little money, it’s important to invest in assets that align with your risk tolerance. Less risky assets like bonds and high-yield savings don’t have as much return potential but they are less likely to lose value. More aggressive assets like stocks have higher return potential but also higher risk.

Complete a risk tolerance questionnaire to get a sense of what you are comfortable with.

Choose the right investment account

There are several types of accounts for investing:

• 401k – Contribute pre-tax dollars from your paycheck. Many employers offer matching contributions.
• IRA – Individual Retirement Account, can be traditional pre-tax or Roth post-tax.
• Taxable brokerage account – Investments are subject to capital gains taxes. Good for non-retirement goals.
• Robo-advisor account – Automated investing platforms that use algorithms. Minimal effort required.

Each account has different tax implications, contribution limits, and rules. A retirement account like an IRA or 401k is best if you are investing for the long-term. Taxable or robo-advisor accounts offer more flexibility for other goals.

Start small

One of the biggest advantages when How to start investing with little money is that you don’t need a large amount to get started. Many online brokers allow you to open an account with no minimum deposit. Some robo-advisors have initial deposit minimums of $1 or $5.

Even if you start with only $100 or $500, the important thing is to just start. You can always add more money later when you can. Time in the market is more important than timing the market.

Automate contributions

How to start investing with little money? Make it a habit. The easiest way to invest small amounts consistently is to automate contributions from your checking account to your investment account. Even $25 or $50 per month can add up over time.

Many employer-sponsored retirement plans like 401k allow you to set up automatic payroll deductions. You can also set up automatic transfers from your bank to an IRA or taxable investment account.

Automating your contributions helps eliminate procrastination and makes the process effortless.

Take advantage of company retirement plans

If your employer offers a 401k plan, take full advantage of it. Here are some of the benefits:

• 401k contributions come directly out of your paycheck. This makes the habit of investing easy to maintain.
• Many companies offer matching contributions. This is free money that can jumpstart your savings. Be sure to contribute at least enough to get the full match.
• 401k contributions reduce your taxable income. Money is contributed pre-tax, lowering your yearly tax bill.

Make sure you enroll as early as possible. Contribute enough to get the full company match and increase your contribution rate whenever you get a raise.

Invest in an index fund

Index funds provide instant diversification by holding hundreds or thousands of stocks or bonds in one fund. They closely track market indexes like the S&P 500.

Index funds typically have very low fees compared to actively managed mutual funds. They do not require much maintenance other than occasionally rebalancing your asset allocation.

When How to start investing with little money, index funds are ideal because you can invest small amounts and don’t need to constantly pick stocks. Top index fund providers include Vanguard, Fidelity, Schwab, and iShares.

Use a robo-advisor

Robo-advisors are automated investing platforms that build and manage portfolios using algorithms. With robo-advisors, your money is invested in ETFs and index funds for you based on your risk profile.

Robo-advisors offer ease-of-use, low account minimums, and passive investing. Leading platforms include Betterment, Wealthfront, Ellevest, and SoFi. They charge annual management fees between 0.25% to 0.50%.

Many robo-advisors have no minimum deposit requirement. This makes them a great choice when How to start investing with little money.

Avoid high fees

Watch out for fees when investing small dollar amounts. High fees can quickly eat away at your investment returns.

Aim to use index funds and ETFs that have total annual fees under 0.20%. Avoid actively managed mutual funds which often have expense ratios over 1%.

Also beware of trading commissions and account maintenance fees which can sometimes be avoided. Apps like Robinhood allow commission-free trading of stocks and ETFs.

Take advantage of fractional share investing

Fractional share investing allows you to buy a fraction of a share of stock. Many brokers and robo-advisors now offer this feature.

This benefit removes high share prices as a barrier. For example, you can invest just $10 to get .0034 shares of Tesla stock. Top fractional share investing apps include SoFi, Robinhood, WeBull, and Stash.

Fractional shares have the same proportional benefits as owning whole shares. They pay dividends and appreciate similarly.

Consider a micro-investing app

Micro-investing apps allow you to invest your “spare change” from everyday purchases. They connect to your credit card or bank account and automatically invest your round-ups and recurring small amounts.

Popular micro-investing apps include Acorns, Stash, Raiz, and Digit. The fees are usually between $1 to $5 per month. While fees may seem high for small balances, they can be a fun way to passively invest your digital change.

Take advantage of windfalls

Use any financial windfalls as an opportunity to boost your investments. Here are some windfalls to take advantage of:

• Tax refunds – Instead of splurging, invest your tax refund every year.
• Bonuses / raises – Allocate a portion of any work bonuses into your investment accounts.
• Gifts – Invest a portion of monetary graduation or birthday gifts.
• Found money – Put that $20 you found in your coat pocket into your next stock purchase.

Treat windfalls like unique chances to give your portfolio a quick boost. Even small amounts add up.

Get started with $0 commissions

Many leading online brokers like Fidelity and Charles Schwab now offer $0 stock and ETF trades. This allows you to buy stocks and funds commission-free.

Look for brokers that offer free trades on a large selection of investments. Carefully review their account minimums, inactive fees, and other fine print.

Zero commission trades make How to start investing with little money extremely affordable. You can buy one share of stock at a time without fees eating up your investment.

Invest in stocks directly

While index funds provide great diversification, you can further complement your portfolio by buying shares of individual companies you like.

Stock picking should not make up the bulk of your portfolio. However, investing in a few companies you believe in can be engaging and provide motivation to add more money over time. You can now buy fractional shares of expensive stocks like Amazon or Google for under $10.

Only invest in stocks if you are willing to hold them for 3-5+ years. Avoid constantly trading stocks or buying based on hype. Look for great companies with solid long-term business prospects.

Reinvest all dividends

Once you begin investing in stocks and stock mutual funds, you’ll start earning dividends – your share of company profits.

Set all your accounts to automatically reinvest dividends rather than receive payouts in cash. Reinvesting dividends allows you to accumulate more shares and compound your returns over time. This snowball effect can accelerate the growth of your portfolio.

Every single contribution and reinvested divided expands your wealth and puts your money to work earning more money.

Avoid cash drag

Cash drag refers to having excess cash in your investment account not invested. Cash earns little to no return, so it drags down the overall return of your portfolio.

Having some cash is fine for emergencies or buying opportunities. However, make sure you put any excess cash to work by investing it. Sign up for automatic contributions if needed to fully deploy your cash.

Studies show cash drag significantly reduces long-term returns. For example, over a 30-year period having 20% in cash resulted in 60% less money compared to being fully invested.

Start early and be consistent

How to start investing with little money? Make investing a lifelong habit, even if you can only afford small amounts now. Starting early and consistently adding to your investments is the key to long-term growth.

The combination of starting early and compound returns will build significant wealth over decades:

• Investing $100 per month starting at 25 = $471k by 65
• Investing $100 per month starting at 35 = $148k by 65
• Investing $100 per month starting at 45 = $50k by 65

No matter your current age, the best time to start investing is right now. Use the tips in this article to begin your journey of building lifelong wealth.

Key Takeaways

• Set clear investing goals
• Understand your risk tolerance
• Use retirement and taxable accounts
• Start small and automate contributions
• Use index funds and avoid high fees
• Take advantage of fractional shares
• Reinvest dividends and avoid cash drag
• Start early and stay consistent

How to start investing with little money is achievable for anyone. By developing smart habits and using the tools outlined above, you can build a solid foundation of financial security and independence.

References

• 20 Ways to Start Investing with Little Money. Forbes. (2021). https://www.forbes.com/advisor/investing/how-to-start-investing-with-little-money/
• How to Start Investing in Stocks: A Beginner’s Guide. The Motley Fool. (2022). https://www.fool.com/investing/how-to-invest-in-stocks/
• Investing 101: How to Start Investing. NerdWallet. (2022). https://www.nerdwallet.com/article/investing/how-to-start-investing
• How to Start Investing: The Ultimate Beginners Guide for 2022. Business Insider. (2022). https://www.businessinsider.com/personal-finance/how-to-start-investing
• Investing for Beginners: How to Get Started. Charles Schwab. (2022). https://www.schwab.com/resource-center/insights/content/investing-for-beginners-how-to-get-started