Got only $20 to put away right now?
You can use it to buy shares in Intel
We're not here to tell you where to invest your money. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash.
How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high-interest debt and that you have some money stashed in a safe place (like a savings or money market account), which you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough and you want to begin investing for your future.
Is it even worth it to invest such a pittance?
Heck, yeah! One of the best ways to invest small amounts of money cheaply is through dividend reinvestment plans (DRPs), also known as Drips. They and their cousins, direct stock purchase plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.
More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (known as "dollar-cost averaging"). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.
While you have to keep good records for tax purposes, Drips may be one of the surest, steadiest ways to build wealth over your lifetime. (For more details on Drips, see "What if I can only invest small amounts of money every month?")
How to invest a couple of hundred bucks
You've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund. An index fund that tracks the Standard & Poor's 500 is your entrée into an investment that, over the long term, has returned an average 10% a year.
There are some index funds that require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.
How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and will now have your pick of fund companies that have higher minimum initial investment requirements. This freedom will enable you to shop around for a fund with the lowest expense ratio.
You should also put some serious consideration into opening a discount brokerage account. You'll want to focus on the account option that best serves your needs -- an account that has a minimum initial deposit, or even none at all. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders, a stock-like investment that mimics the performance of the S&P 500.)
The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.
How to invest $1,000+
What can you do with one grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.
Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. Your mileage may vary, so use our handy calculators to play with the inputs.
Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions) are less than 2% of your account's overall worth. Nowadays, with such low commissions being offered by discount brokers, it's easy to manage your account for much less than 2% of your assets annually.