If you’ve ever wanted to start investing but thought you didn’t have enough money or worse you were turned away by one of the big financial institutions for not having enough money there are a couple of great ways to get started without a lot
Before you invest there are a couple of things you have to do to
ensure that you’re going about it the right way.
1. Take a financial inventory: Conduct a financial inventory by taking a few minutes to an hour and review your finances. When you review your finances make sure you have a budget and are sticking to it. Next, figure out your net worth by listing all the things you own (savings accounts, retirement accounts, house, car, jewelry, etc) and subtracting everything you owe (credit card debt, student loans, personal loans, house, car, etc).
2. Pay off high-interest debt & Save For Emergencies: After you’ve reviewed your expenses and your net worth if there are any credit cards or other debt that has high-interest rates make sure to pay off these debts before you invest. There’s no point in investing in an investment earning 10% if you have to pay a credit card company 12 or 20% on your debt.
3. Start Investing: We know investing can seem impossible, especially when every dollar of your budget is
committed to one expense or another. You may have
even found the stocks, mutual funds or exchange-traded funds you want to invest in but you discover that the initial amount needed to invest is way too high for your budget.
Don’t let this discourage you. There is a great way to get started with micro-investing. What is micro-investing you ask? It’s exactly what it sounds. like. Micro-investing allows you to invest in small increments without having to come up with a ton of cash upfront.
Two apps you can use to get started micro-investing are Acorns & Stash.
With the help of Acorns and their app, you can literally use your spare change to start investing. Not an expert in investing? Don’t worry – the app invests your change in a portfolio for you.
For example, if you make a purchase for $1.50 the app will round up your purchase to the nearest dollar. This extra $.50 is added to your portfolio. You can even see how much your investments can grow over time.
Bank of America and Wells Fargo use a similar concept as a way to help customers save.
Stash on the hand, let’s you get started investing with as little as $5. The main difference between the Stash & ACORNs is that Stash does not invest for you, they make recommendations for you.
There are two key advantages of investing this way 1) use of dollar cost averaging and 2) you don’t have to come up with a large initial investment.
Micro-investing offers two key benefits:
First, dollar cost averaging. Simply put, this is investing the same dollar amount on a regular basis. For example, if a stock is $5/share in January and you invest $50 per month, you’d be able to get 10 shares. If the stock is trading at $6.00/share by June and you’re still investing $50 a month, you would now own about 8 shares.
The good thing about dollar cost averaging is that you buy more shares when the price is cheap and fewer shares when the stock is expensive. When you take the average cost over a long period, you come out ahead.
Second, no large initial deposits are needed: Unfortunately, some investments have a minimum amount required for investment. For example, there are mutual funds that require $2,500 for the initial deposit. That’s a lot of money, right? The average person cannot afford this cost. This is why micro-investing makes sense for most people. It allows you to dabble in the investment world without committing large amounts of cash.
The thing to keep in mind about any type of investment is to make sure you pay attention to the amount that’s being invested; 1) the fees involved 2) how comfortable you are with the strategy being used and 3) any tax implications you incur should you choose to sell your investments and withdraw your money.
If you want to invest more than spare change consider investing in an exchange-traded fund (ETF). These funds trade like stocks and their main goal is to achieve the same return as a specific index, like the S&P 500.
You can set up an account at a brokerage company that has no minimum balance requirement (ex. Betterment, Sharebuilder, TradeKing, etc) and purchase an ETF that has a low minimum investment requirement like a Vanguard or Schwab ETF. You can invest in some ETFs with as little as $50 or $100.
You can still take advantage of dollar cost averaging by investing in an ETF with a brokerage firm that offers commission-free ETFs like E-Trade or TD Ameritrade.
If you’re not ready to commit $50 or $100 then start by investing your change after reviewing your finances and asking yourself if investing makes sense for you right now. If so, consider starting small with micro-investing.