Just because you don't have thousands of dollars lying around doesn't mean you can't get into investing. We asked five of our contributing writers how they would invest $100 per month. Here are their answers.
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An index-tracking mutual fund
Dan Caplinger: Many people think that $100 per month is too little to start investing, but there are actually some great choices you can make to begin an investing strategy even with such a small amount of money. One of the best ways to start is to invest in an index-tracking mutual fund, which will give you much-needed diversification despite having only minimal assets to invest. You'll also get the certainty and stability of knowing that your investment will track the market benchmark of your choice, whether it is a popular index like the S&P 500 or a more specialized index.
Most mutual fund companies say that they want higher minimums to start a fund account, with amounts like $1,000 being fairly typical. Yet if you're willing to make regular additions to your account on a monthly or quarterly basis, starting with $50 or $100 is an option at several different fund companies that have viable low-cost index mutual fund choices available.
Once you've built up a solid foundation in your index fund account, you can then branch out and take on the greater risk of individual stocks if you want. For many, though, an index mutual fund is all you'll ever really need in order to succeed with your investing.
An emergency fund
Jason Hall: There's a lot of compelling evidence that investing in stocks is the best way for the regular guy (and girl) to attain financial independence. Unfortunately, a lot of people don't understand how important it is to also have a strong margin of safety. For most of us, the best margin of safety is cold, hard cash.
If you don't already have six months' of living expenses (maybe more if you have kids and a mortgage), then the best place for you to start with that $100 per month is putting it in a savings account.
Yes, with current interest rates you won't get much of any return on your savings, but it's important to remember that a safety net isn't about getting return, but about keeping you from having to dip into investment accounts like your 401(k) if you have a financial emergency.
This is especially true if you were to lose your job, or suffer an unexpected illness or accident that impacts your income for weeks or even months. Having the margin of safety of several months of income in cash will mean that life's unexpected events won't end up affecting your retirement plans. Interest rates stink, I know, but this is about protecting the downside. Not capturing more returns.
An exchange-traded fund
John Maxfield: I believe the best way to invest $100 a month is to dollar-cost average into a low-cost exchange-traded fund. In fact, I believe this is the best way to invest irrespective of how much you can afford to do so.
Humans are designed to be bad investors. We make decisions using emotion as opposed to reason. And we suffer from a litany of behavioral biases that impair our ability to make rational financial decisions when they matter most. The net result is that most investors end up buying stocks when they're high and selling them when they're low.
One way to avoid this trap is to commit yourself to purchasing equal amounts of a stock at predetermined intervals -- in this case, $100 every month. By doing so with a low-cost exchange-traded fund, moreover, you not only minimize the corrosive impact of costs on your returns, you also reduce your exposure to idiosyncratic risk -- that is, the risk that a specific company's stock will flounder while the market rises.
Individual stocks
Sean Williams: If you've got $100 that you're able to stash away on a monthly basis, I'd encourage you to go against the grain and consider investing in individual stocks.
I understand why the idea of buying individual stocks with only $100 being saved per month may not seem appealing. For starters, you're liable to lose 20% of your investment right off the top with the standard $9.99 commission to buy and sell a stock. Plus, there's the perception that if you aren't investing a significant amount of money you'll never see substantial returns on your investment.
The good news is we can pretty much debunk both theories.
For starters, if you're willing to do your homework and shop around among brokers, you're liable to find a great deal. For instance, NerdWallet highlighted TradeKing in 2015 due to its bare-bones $4.95 commission and lack of a minimum deposit requirement. There are a few possible caveats with a low-cost broker, such as inactivity fees or extra costs associated with purchasing stocks trading under $2 per share, but overall a low-cost broker could be a smart move if you're only putting away $100 per month.
Also, buying individual stocks is going to give you a chance to outperform the broader market averages over the long run. When we're talking about years or decades of holding a quality stock that may even pay a dividend, what's 10% lost to commission? Probably not a lot when we're talking about a market that has historically gained 8% per year. If the commissions are really a bother, you can always build up your savings to $200 or $300 and make regular purchases every two or three months, thus reducing your cumulative commission costs.
An IRA
Matt Frankel: I'd like to add to all the excellent advice above that the type of account you choose to invest in can be even more important than what you choose to invest in. If I were planning to invest $100 per month, I'd be sure to do it in a tax-advantaged account like an IRA.
There are two types of IRAs -- Roth and traditional, with the principal difference being tax benefits. Traditional IRA contributions may be deductible on your taxes, so by investing $100 per month you could end up with a $1,200 deduction at the end of the year (savings of $300 if you're in the 25% bracket). On the other hand, Roth IRA contributions aren't deductible, but your withdrawals in retirement will be tax-free. Plus, in a Roth account you have the option of withdrawing your original contributions (but not earnings) for any reason. With both accounts, your money compounds with no capital gains or dividend taxes each year.
The long-term savings can be huge. For example, let's say that you stash $100 a month in a Roth IRA for 30 years. Based on the S&P 500's historical performance, you could end up with a nest egg of nearly $180,000. If you are in the 25% tax bracket at retirement, having this money in a Roth IRA could mean $45,000 in tax savings -- and that doesn't even consider the dividend and capital gains taxes you didn't have to pay along the way. If you really want to push yourself to save more, you can put up to $5,500 into an IRA in 2016 -- or up to $6,500 if you're aged 50 or older.
The takeaway is that any of the investment choices presented here will earn you much more if you keep them in the right kind of account.
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