According to a recent survey by Bankrate, six out of 10 people in the U.S. do not own any mutual funds or exchange-traded funds. Alarmingly, 68% of non-investors say they simply cannot afford to invest any of their money.
Source: 401kcalculator.org via flickr
Now, it is certainly understandable to feel that way. After all, a significant portion of the U.S. population is either unemployed or underemployed, and for those who do have jobs, wage growth has slowed to a halt in recent years.
And, a lot of people think you need a lot of money to be able to invest effectively, which is simply not true. When it comes to investing, even a small amount of money is better than nothing, and you might be surprised how little you can get started with and how far it could take you.
You could get started for a dollar (really)
There are tons of investment options out there with no minimum to get started. For example, you can open a brokerage account with any amount of money through one of the big discount brokers like TD Ameritrade or E*TRADE.
And, you can choose between a traditional brokerage account or an IRA account, which generally prohibits withdrawals before you're 59.5 years old but has some nice tax benefits. For a more thorough description of the two main types of IRAs, check out this article.
With TD Ameritrade, for instance, the electronic funding minimum is $50. However, you can easily get around that by simply mailing a check. Could you spare $20 per paycheck? Mail them a check for that amount and watch your funds build up. If you get paid bi-weekly, this adds up to $520 per year, and it's amazing how this much money can compound over time.
Of course, commissions can make it impractical to invest $20 at a time. Generally, commissions from the major brokerages are between $6.95 and $10, so you'll want to let your money build up a little bit before buying funds or stocks.
The government might even pay you to invest
Many people don't realize it, but the IRS offers a tax credit specifically designed to encourage low-income individuals to invest for their retirement.
Source: 401kcalculator.org via flickr
If you are single and earn less than $18,000 in 2014 ($36,000 for married couples), you can qualify for a tax credit worth 50% of your first $2,000 in retirement contributions, or up to $1,000. And, taxpayers with incomes of up to $30,000 ($60,000 if married) can qualify for a partial credit worth either 10% or 20% of your qualifying contributions.
In other words, the government is literally paying you to invest. Even if you qualify for the smallest (10%) credit, it's like getting a 10% return on your investments before you even start.
The only catch is that the contributions must be made to a qualifying retirement account like an IRA, so make sure you open the right type of account if you plan to take advantage of this. For more information on what qualifies and how to claim the credit, the IRS has a helpful instruction sheet (link opens a PDF).
The awesome power of compounding
Now, some people may be asking just how much of a difference saving $20 per paycheck could really make. Quite a bit, actually.
Savings of $20 per paycheck add up to $520 per year if you get paid bi-weekly. If you were to do this for 35 years and earn the S&P 500's average annual total return, you'll end up with nearly $90,000. And, if you could bump up your contributions to $100 per paycheck, that's nearly $450,000 in savings.
That's the power of compound interest, and these returns don't even include any tax credits or other benefits you may be entitled to.
So, even if you don't think you can "afford" it, start investing anyway. A little bit of money can really make a difference to your long-term financial security, so see if you can come up with a few bucks here and there to set aside.
