To beginners, watching experienced investors grow their wealth can feel like watching a magician cover an empty box only to unveil their beautiful assistant a second later. You know the transformation isn't really magic, but you're at a loss as to how to replicate it yourself. It would take practice to learn to dazzle audiences like the pros, and you'd probably have to start with some basic tricks to build your confidence.
Investing is the same way. You're not going to throw $100 in the stock market and wake up tomorrow richer than Warren Buffett. But by starting slow and staying committed, you'll grow more confident and skilled over time. Here's a simple strategy you can use to get started that only takes $5 a week.
How to turn $5 a week into over $37,000
Follow these simple steps to turn your pocket change into five figures in your investment account.
Step 1: Find $5
The obvious first step is to find a spare $5 a week. You don't want to invest money you're going to need for bills or emergencies, because the stock market can be volatile in the short term and you may have to sell at a loss if you need cash in a hurry. Only use money you won't need in the next five years or so. If you don't have much extra cash, look for ways to cut back your spending, like skipping one morning coffee shop visit a week, to get the cash you need.
Step 2: Decide where to put your money
Next, decide where you're going to invest your money. Any brokerage account will do, but a retirement account is the best option for most people because they offer special tax advantages that can help you keep more of your money. If your company offers a 401(k), you could start there, or you could open an IRA on your own.
Step 3: Decide what to invest your money in
What you invest in is a personal decision that depends on your goals and risk tolerance. A $5 weekly investment isn't enough to buy a full share of a large-cap stock, but there are still ways to invest in big companies with only a few bucks.
Index funds are collections of many stocks that track a market index. They have pretty low fees and let you instantly have your hand in hundreds of companies. Fractional shares are another option that are becoming increasingly popular. They let you purchase less than a full share of a company. You have a smaller ownership stake so your gains won't be as large as if you purchased a single share, but the entry cost is much lower.
Step 4: Start contributing and watch what happens
Automate your contributions if you can to help you avoid forgetting to make them and keep you committed to your goal. Check with your broker or retirement plan administrator to learn how to set up automatic contributions.
How much you'll earn depends on what you invest in, how well it performs, and how long you hold it before selling. For our example, we're going to assume you invest $5 every week for 35 years and you earn a 7% average annual rate of return over that time. In total, you'd end up contributing $9,100 of your own money. But your investments would be worth approximately $37,161. That's over $28,000 in investment earnings.
And that didn't come from speculating on what the next hot stock was going to be or trying to time the market. It was simple buying and holding, which is usually the best strategy for most investors. Suddenly, it doesn't seem so cryptic, does it?
Of course, profit is never a guarantee in investing, but if you're patient, avoid emotional buying and selling, and invest in solid beginner stocks or index funds, you'll probably do pretty well over time.
Putting it into practice
If you're ready to give investing a go, try the tips above and see how it works out for you. And don't feel limited to just $5 a week if you can afford to spend more. Just remember not to use cash you think you'll need in the next few years. Set that money aside and use what's left over for investing.
Retirement savers should calculate approximately how much they'll need in retirement and then use a retirement calculator to help them determine how much they should invest each month to hit their goal.
When done right, investing is a long game, so don't get too hung up on short-term performance. Anything worth doing or having takes some effort, but it'll get easier over time the more you practice.