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8 Easy Ways to Start Investing with Little Money
In the past, it was almost mandatory to have a substantial amount of money on hand to make your initial investment in a mutual fund or open a brokerage account, and most people seem to believe that in order to begin investing, you must be rich. However, things have changed in recent years. That is simply not true anymore. Today, the barrier to entry has been eliminated, thanks to companies and services that have made it their task to make investment choices open to all, including beginners and those with small amounts of money to invest.
There are numerous ways to begin investing with little capital, and many online and app-based platforms make it easier than ever. Some are riskier and more unpredictable than others. Investing in several of these ideas will help you diversify your portfolio and mitigate risk.
1. The cookie jar approach
The simplest and most basic method of investing is to do it yourself, also known as the cookie jar method.
If you’ve never saved before, you can begin with as little as $10 per week. That might not sound like much, but over the course of a year, it adds up to more than $500. Though it may seem silly, it is often a required first move. Make it a habit to live on a little less than you earn, and save the difference in a safe place.
The electronic equivalent of the cookie jar is an online savings account. A high-yield savings plan is a low-risk way to collect returns on the entire balance of your account. Fortunately, most online banks are free and don’t require a minimum balance.
Today’s best online high yield savings accounts pay 0.8 percent to 1.4 percent interest, which is much higher than the rate provided by a local bank. If you just do one thing from this list, make it opening a high-yield savings account.
2. Certificates of Deposit (CDs)
If you invest in a certificate of deposit, you may be able to earn even more money than a high-yield savings account (CD). CDs function similarly to savings accounts, but you can receive higher interest rates by agreeing to leave the money alone for a specified period of time known as a “term.”
A 12-month term CD, for example, means you spend for 12 months. When the investment period expires, you may withdraw your funds without penalty. If you need the money before the CD’s term ends, you’ll have to pay a fee and forfeit your interest earnings. Many online banks have CDs with terms of up to five years (or as short as a few months.)
CDs have lower returns compared to other forms of investment, but the risk is also much lower. In fact, if you use an insured bank, there is virtually zero risk involved.
3. Mutual funds
Mutual funds are multi-stock and multi-bond portfolios that you can invest in in a single transaction. That means you can benefit from the international stock market without having to learn how to analyze and invest in stocks.
Usually, a professional manager decides how the fund is invested, which means you will get the most out of your investments without having to lift a finger, but there will be some sort of overarching theme: A U.S. equity mutual fund, for example, will invest in U.S. stocks (also called equities).
4. Index funds
One of the perils of investing in stocks is the high cost of individual shares. Index funds are one of the simplest and least costly ways to invest. They’re like mutual funds on autopilot. These funds track the performance of a stock market benchmark like the S&P 500. The S&P 500 is a market index that contains the stocks of approximately 500 of the largest corporations in the United States. An S&P 500 index fund will seek to replicate the performance of the S&P 500 by purchasing stocks from that index.
Since investment managers do not sell stocks often and don’t pay taxes, not having to predict which stocks will outperform the market keeps investing costs low. Index funds, as a result, have some of the lowest investment costs.
Minimum investment criteria may apply to index funds, but some brokerage firms, such as Fidelity and Charles Schwab, offer a variety of index funds with no minimum. That means you can start investing in an index fund for as little as $100.
5. Exchange-traded funds (ETFs)
Are you considering investing in something like a mutual fund? Consider purchasing shares in an exchange-traded fund. ETFs trade like stocks, as opposed to mutual funds, which can require a minimum initial investment. They have a set share price and can be bought from almost any broker. So, with an ETF, you can buy a few shares as long as you have enough money to do so.
The primary distinction between ETFs and index funds is that, unlike index funds, ETFs are exchanged during the day and investors purchase them for a share price, which, like stock prices, will fluctuate. The share price is effectively the ETF’s investment minimum, and it can range from under $100 to $300 or more depending on the fund.
Thematic ETFs invest in businesses based on a particular market or investment goal. These funds are riskier than index funds because they have a more focused investment approach. Examples of thematic ETFs include:
- Clean energy
- Healthy living
- Consumer staples
6. Cryptocurrency trading
Cryptocurrencies are becoming more common. While trading them could seem risky, hedging your bets here as well may reduce the fallout from a poorly timed trade. There are also various sites for trading cryptocurrencies. But, before you dive in, do some research. Learn the intricacies of trading Bitcoin, Ether, Litecoin, and other cryptocurrencies.
Most common cryptocurrencies, including Bitcoin, can be purchased directly with US dollars using exchanges such as Coinbase, eToro,Binance, Cash App, and Robinhood. To buy cryptocurrency, you must first create an account on an exchange, move real money to that account, and then buy your cryptocurrency of choice with that money and deposit it into your wallet.
7. Peer-to-peer lending
Peer-to-peer lending platforms allow you to provide small bursts of capital to companies or individuals in exchange for an interest rate. You get more money than you would in a savings account, and your risk is minimized because the algorithms do a lot of the work for you.
Platforms like Prosper and Lending Club can help you get started with just a little bit of money. You can start investing with a $25 minimum on Prosper.
Prosper claims historical returns averaging 5.3% annually. This rate includes the average default rate that reduces potential returns. You may want to start with a few smaller loans to see how it goes, then raise the amounts if you think it’s worthwhile.
Robo-advisors first appeared on the investing scene about a decade ago, with the aim of making investing as easy and affordable as possible. These services use computer algorithms to handle your investments for you. They charge low fees in contrast to human investment managers because of their low overhead — a robo-advisor usually costs 0.25 percent to 0.50 percent of your account balance each year, and many allow you to open an account with no minimum.
The robo-advisor gradually changes the asset allocation into a more cautious approach as you get older. For example, you might begin with a 90 percent stock position and gradually reduce it to a 70 percent position. Robo-advisors are cheap and well worth it.
Here are some of the best robo-advisors to consider first:
- M1 Finance
You can read more about the best robo-advisiors of 2021 in our blog.