So You’re Ready To Start Investing But Don’t Have A Large Sum of Money Saved Up?
Everybody seems to be doing it. They all seem to be having so much fun! Drinking champagne…Living the high life…Riding around in limos! What do they all have in common? They’re investing!
There are many articles out there that focus on what one can earn by investing. Heck, some event talk about investing small amounts throughout a lifetime. But few that discuss how to do so for the brand new beginning investor. Where do you go to start? Are there any financial coaches out there who can be trusted not to treat you like a small fish? Are there investment vehicles that will take you to your financial promised land?
Following are some guidelines for a beginning investor that can help you get started investing small amounts regularly.
In the stock market, uncertainty is always present but starting small allows you to learn and become educated to the world of high finance without risking your entire life savings (at first). So finding ways to invest today, even if you have small amounts of money to do so can really help start you on the path to your financial independence in years to come.
I hope you realize that it goes without saying that you should always invest in any employer sponsored retirement plans and work to pay down high-interest debt before tackling solo investing. If you’ve covered those bases then read on!
In no particular order I would recommend that you:
Start with a Free or No Cost Online Broker
One of the biggest hurdles you will face when investing small amounts is minimizing transaction fees which can eat into your already tiny sum. If you are investing small amounts of money to start, it makes more sense to handle your own investments, other than investing through your 401k plan.
Avoid having your nest egg eaten up with fees by using an online broker that charges small transaction costs each time you choose to invest. Many brokers will offer free trades if you have a certain minimum balance. If you can find one, consider saving for a few months before you open one to avoid these transaction costs. Also see if you can reduce costs by connecting your investment brokerage account to your checking and savings account. Further, check to confirm that the broker offers a DRIP account (see below).
Automatic Investments and Subscription Services
Automatic investments or subscription based models in which you automatically contribute an amount into a single company’s stock is considered a cost-effective way to invest.
Many companies have their own subscription models set up which offer free investing at discounted prices. These services allow you to invest small amounts that you may not initially notice but which can add up to larger stock positions after several years of doing so. Setting up a contribution amount with regularly scheduled increases can lead to further growth in in your portfolio as time goes on.
DRIP investing is an acronym for a Dividend Re-Investment Plans and is one of the most effective ways to invest in small quantities. DRIP plans are most effective when you invest in stocks that pay dividends to shareholders.
With a DRIP investment any dividends that you receive will be reinvested in the stock at the current value of the stock when you receive the dividend. Over a long period of time, even a small initial investment can lead to significant balances in the stock after a long period of collecting and reinvesting the dividends.
Like using the snowball method to reduce debt, this is more about the momentum of a stock investment building itself up over a period of time. In addition, companies that grow their dividends each year can lead to a significant return especially over, say, 10 years or so.
DRIP reinvestments are generally not charged with a fee and you can invest small dividends without cost, which makes this an attractive proposition for those investing small amounts.
Benefits of Investing Small Amounts
It is important to get started investing, even if you are only investing small amounts. Doing so gets you into the game and allows you to learn a lot of the nuances of investing with your skin in the game.
Further, by investing small amounts regularly you’ll avoid spending all of your investment dollars at the high of the market and are instead are reducing risk by doing something known as dollar cost averaging into your stock positions.