When I started investing in the stock market back in 1993, my wife and I were dirt poor. I’d just graduated from law school, and our net worth was a negative $55,000. We still wanted to start investing, but we were faced with a big problem–how do you invest when you don’t have much money?
The most we could come up with was $50 a month. I had never invested before, so the idea of going to a stock broker (the Internet wasn’t an option back then) was completely over my head. And then a friend introduced me to the Legg Mason Value Trust mutual fund. With automatic investments from my bank account each month, we were able to start investing with just $50 a month. Unfortunately, a lot has changed since then.
It can be very difficult to find reasonably priced stock investments when you have little money to invest. Even great funds like Vanguard typically require a minimum investment of $3,000. The venerable Vangaurd 500 Index Fund (VFINX), for example, requires a $3,000 initial investment and additional investments must be at least $100 each.
But there are some good options for those with limited funds.
How to Invest with Little Money
So with very little cash, how do you get started investing? There are several options you could take, and I’ll start with my two recommendations.
Recommendation #1: Save up the cash so that you can buy a Vanguard fund. This may not be what you expected, but Vanguard mutual funds are extremely inexpensive to own. The Vanguard 500 Index fund mentioned above has an expense ratio of just 0.17%. That means that for every $1,000 you have invested in the fund, your annual cost will be just $1.70.
If I were advising my children, I’d recommend that they start saving as much as they can in a high interest savings account. Once they saved $3,000, invest in the Vanguard 500 Index fund. It offers excellent diversity at a low cost.
Recommendation #2: For those that don’t want to wait, I’d recommend Betterment. The team behind Betterment has created an online community that makes investing as easy as using online banking. Opening an account is free, and unlike most other investments, there is no minimum balance requirement.
With Betterment, you can invest as little or as much as you want each month. And that’s what makes it great for those without a lot of money. And you can quickly decide how much of your money is invested in stocks and how much in bonds. After that, Betterment does the rest, investing your money in a series of exchange traded funds.
A word about costs. If you start investing say $25 a month with Betterment, you pay an expense ratio of 0.90% (it goes down as you invest more). In other words, for very $1,000 invested, the annual cost is $9. Recall that the Vanguard fund would cost you $1.70 per $1,000 invested. While the difference may not seem like much, over the course of decades of investing, it adds up to a lot of lost money. To see this first hand, check out How Half a Percent Can Ruin Your Retirement. Nevertheless, Betterment is a good way to get instant diversification, is easy to use, and has no minimum investment requirements.
If you are really eager to start investing, one of our recommended choices is Wealthfront. They have an easily attainable minimum balance, low fees, and a simple, convenient interface. They’re a great choice to start investing easily and quickly.
There are other options. For example, you could open a discount brokerage account online and invest for as little as $4 a trade. But if you are investing just $25 a month, losing $4 of the investment to fees is just too much. If you take this approach, I’d suggest that you save the $25 and invest it once every four months. This way you pay the trading fee just three times a year, rather than 12 times. And while there are many good discount brokers, I’d recommend OptionsHouse because it offers a flat $3.95 trading fee for ETFs.
Finally, you can always invest small amounts in a 401(k) retirement account. This of course assumes that your employer offers a 401(k) and that you want to lock your money away until retirement. But if that’s not your goal, either saving $3,000 to invest in a Vanguard fund or using a service like Betterment are two great ways to start investing small amounts of money.Topics: Investing