How to Invest Small Amounts of Money Wisely

Investing isn’t just for the wealthy. If you have a few thousand or even less than a hundred dollars saved, here are some suggestions on how to make the most of it.

Note: This article assumes that you’re looking for something more lucrative than high-yield savings accounts and CDs.

Steps

  1. Set aside a small allowance for investing. Do this first and foremost, even if you can only set aside a few dollars out of every paycheck at first. Even $5 per week will add up to an additional $260 per year.
  2. Next, decide whether to Invest More or Pay off any high interest debt and build up an emergency fund first.
  3. Promise yourself that you’ll keep your costs of investing (fees, commissions) to less than 2% of the transaction value, no matter how much you’re investing. Multiply the amount you have to invest by .02. If the trading cost is more than that, put your money in a savings account instead until you can find an investing opportunity with a better ratio.
  4. Choose one of the investing options below.

 

If you have $20

  1. Invest directly with Dividend Reinvestment Plans (DRPs) and Direct Stock Purchase Plans (DSPs). With these, you don’t have to deal with brokers (or pay their commissions) because you buy stock straight from the company.
    • Not all companies do this, but you still have over 1,000 to choose from.[2] You’ll have to search for the companies that offer a direct purchase program, but you can find a partial list here.
    • In most cases, you can make an individual purchase or set up an automatic payment plan.
    • There may be a nominal commission or a minimum purchase requirement.
    • The main difference between DRIPs and DSPs is that to participate in DRIPs, you must already own at least one share of the company’s stock. You then collect your dividends in the form of additional shares instead of cash.
  2. If the company you want to invest in doesn’t have a Drip plan, look for a broker that lets you set up Drip-like accounts with which you can buy shares of stocks with low transaction costs. Just check the following:
    • Does it have a monthly minimum?
    • Does it have a higher charge to sell a stock? That might be an issue if you’re an active trader.
  3. Look for mutual funds with a small buy-in. There are a few mutual fund companies that will allow small investors to buy in, but you’ll have to agree to an automatic investment plan, whereby you let them deduct a fixed amount from your bank account every month (usually at least $25). This is usually in addition to a minimum initial investment (starting at $25).

 

If you have up to $500

  1. Invest in an index fund which tracks the broad market. Through boom years and recessions, since its inception the S&P 500 index funds returned about 10% a year.[2]Once you make your first payment, you can add as much money as you want and as often as is convenient for you without any additional costs or commissions. Since you deal directly with mutual fund companies, you don’t have to pay a broker a commission.
    • The minimum varies, but with an IRA (USA only) you can invest as little as $250. (SeeHow to Open a Roth IRA Account.)
    • If you have $500, you can be a little pickier. Look for an index fund with a low expense ratio.
  2. Consider opening a discount brokerage account. A discount broker doesn’t offer all of the services of a full-service broker, but they still allow you to purchase individual companies. Some accounts require a minimum initial deposit.
    • Until you can invest a few thousand dollars at a time, which means you should have many thousands of dollars to spread out your risks, don’t try to profit off of short-term price swings. The high relative costs of commissions will make this unlikely to work well over time. Instead, plan to hold your investments for a long time, generally years, and as such choose them for fundamental value. This will expose you to more company-specific risk, so don’t use it as your primary form of savings — focus on index and other mutual funds (plus bank deposits).

If you have $1000

  1. Follow the steps in the previous section, unless you’re confident you can save $1000+ annually, in which case you should consider a retirement account.

Tips

  • Keep track of your investments for tax purposes.
  • Keep in mind that this is money for investing, and nothing else, so you need to realize that it won’t be readily accessible (that’s what your emergency fund is for) and that there’s a chance you will lose it (so if losing that money will somehow ruin your life, don’t invest it).
Tags: ,

Related posts

This entry was posted on Monday, October 3rd, 2011 at 6:26 pm and is filed under Banking/Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.