Investing is an exciting but daunting concept. Putting your savings to work earning more money for you sounds great, but most people don't have a spare $1,000 just lying around. Can you still invest in stocks with a more modest sum?
Good news! You don't need a lot of money to start investing. In fact, you could start investing in the stock market with as little as $10, thanks to zero-fee brokerages and the magic of fractional shares.
Here's what you need to know about how to transform even a small amount of money into the beginnings of an investment empire.
What is the right amount to invest?
The short answer is that it depends on your personal financial situation and your investment goals.
If you've got a lot of money sitting in a checking account and you're interested in saving for retirement 30 years down the road, your "right amount" is going to be very different from that of someone who's maxed out their credit cards and is hoping to put a down payment on a home in five years. So while you can invest any amount -- big or small -- what you should invest is up to you.
Here are some general guidelines on how to choose the right initial investment amount:
- Pay off debt first: Sure, it may be tempting to start making money right away, but investing is a long-term activity. Your investments will probably start generating money slowly but gradually earn more and more, thanks to the magic of compound interest, dividends, and growth. This means that, at least at first, high-interest debt like credit card debt is likely to cost you more money than you make through investing. So pay down any debt with more than an 8% to 10% interest rate before investing your money.
- Make a budget: Money you put into, for example, a Roth IRA -- which charges big penalties if you withdraw it before age 59 1/2 -- doesn't do you any good if you can't make rent. To be sure you're able to set aside money for investing, write out a monthly budget that outlines your mandatory expenses (like utilities, loan payments, and groceries) and discretionary spending (like entertainment and eating out). That should help you determine what you can afford to put toward investing.
- Don't forget about emergencies: We've all had that unexpected expense -- a car repair, medical emergency, or layoff -- that blows our budget out the window. While putting money into a retirement plan or account can offer tax advantages, it makes those funds much harder to access in a hurry. Make sure you have the means to pay for an emergency by setting aside money in a savings account.
Once you've done those basic calculations and established some financial goals, you should be able to find an amount you can commit to investing every month. Yes, every month: Putting in a lump sum once and forgetting about it will pay off in the long run, but putting in a little bit more every month will help you reach your financial goals sooner.
Maybe that amount is $2,000 a month. Maybe it's just $10 a month. The overall amount doesn't really matter as long as it's right for you.
How can I invest a small amount?
Most major financial institutions have brokerage arms, and, if you have an account at a bank, it may offer some perks for investing with it. However, you may also want to consider an independent brokerage firm or an online-only or app-based broker.
If you're starting with a small sum, make sure the broker you're considering offers the following:
- No minimum balance fees: Investments can go up, but they can also go down. Even if your initial investment amount is higher than the broker's threshold for a "low balance" fee, if you invest in a stock that drops, you might wind up beneath that threshold down the line.
- No commissions or transaction fees: Ten years ago, it would have been unheard of for a brokerage to offer unlimited commission-free trades, but today many, if not most, brokerages have gone fee-free. Make sure yours is part of this trend.
- Allows fractional share purchases: Fractional shares are investments of less than one share of stock. Some brokers will allow fractional shares only in the event of a stock split or reinvestment of dividends that automatically yields fractional shares. With single shares of many stocks costing hundreds or thousands of dollars, your options will be severely limited if you can't directly purchase fractional shares.
Finding it hard to choose which broker is right for you? Compare top online brokers at The Ascent, a division of The Motley Fool.
Once you've chosen a broker, decided what your investing goals will be and have your initial investment amount in hand, you're ready to choose your first investment.
Good luck, and welcome to the amazing world of investing!