Investing can change your life for the better, and the sooner you start, the more you'll have in your investing account in the long run. But many people mistakenly think that unless they've got thousands of dollars lying around, there's no good place to put their money.
The fact is, even if you have only a small amount, you can start investing. In this article you'll learn about five great ways to invest a few hundred dollars. By choosing the method that appeals most to you based on your risk tolerance -- or by mixing and matching multiple ideas -- you can get on the path toward long-term financial security and build up a nest egg that you'll be able to tap whenever you need it.
Our 5 best ways to invest $100
If you've managed to save up $100, here are our five best suggestions for what to do with it:
- Start an emergency fund.
- Consider using a robo-advisor to help select investments for you.
- Invest in a stock index mutual fund or exchange-traded fund.
- Find great individual stocks for your brokerage account.
- Open an IRA.
Below, we'll take a look at each of these in more detail.
1. Start an emergency fund
It's understandable if your first thought was to start by taking your $100 and buying small amounts of stock. After all, there's a lot of compelling evidence that investing in stocks is the best way for regular people to attain financial independence. But a lot of people don't understand how important it is to also have a strong margin of safety with their finances. For most of us, the best way to get that margin of safety is by having cold, hard cash.
If you don't already have three to six months' worth of living expenses set aside -- maybe even more if you have a family and a mortgage -- then the best way for you to start with that $100 per month is by putting it in a savings account as an emergency fund.
With an emergency fund, you can't expect much of a return on your savings. Having that safety net isn't about getting returns; it's about keeping you from going into debt or having to tap your long-term investment accounts if you have a financial emergency.
Imagine if you were to lose your job, or suffer an unexpected illness or accident that affected your income for weeks or even months. Having several months of income available in cash can mean keeping life's unexpected events from damaging your financial plans. Interest rates on savings accounts aren't very high, but this is about protecting your downside -- not capturing high returns.
2. Consider using a robo-advisor to select investments for you
Once you have financial emergencies covered, you're in a much better position to start investing. If you like a fully automated approach that requires as little effort as possible, then a robo-advisor can be just what you're looking for.
Robo-advisors use apps or websites to learn about your financial needs and then come up with an investing strategy to meet them. They'll often use basic information like age, family size, income, and risk tolerance to tailor a portfolio to your needs. Robo-advisors then handle all the details of selecting investments, making purchases and sales, and keeping you informed.
Here at The Motley Fool, we strongly believe you can earn better returns by handling your own investments. But many robo-advisor algorithms do a good job, and you're likely to get better long-term results from robo-advisors than if you never invest at all.
3. Invest in a stock index mutual fund or exchange-traded fund
Putting your money into a stock index mutual fund or a low-cost exchange-traded fund is a great way to start investing with just a little money. Both of these investment vehicles give you diversification by letting you buy small amounts of many different stocks with a modest investment. You can choose from a wide range of stock indexes, ranging from popular ones like the S&P 500 to more specialized indexes.
There are some differences between mutual funds and ETFs, including how you buy and sell shares, what minimum investments apply, and what fees you can expect to pay. But the general idea behind both ETFs and mutual funds is to let you invest in the whole market or in selected parts of it through a single investment.
Once you've built up a solid foundation in these index-tracking funds, you can then branch out and explore other investing options. But an index-tracking fund might well be all you'll ever really need in order to succeed with your investing.
4. Invest in individual stocks through a brokerage account
Thanks to the recent move toward commission-free stock trading, buying individual stocks with just $100 a month is now a cost-effective option for those getting started investing. To start investing in individual stocks, you'll just need to open an investment account with a brokerage company and start making regular deposits of your $100.
In fact, with the emergence of fractional shares investing, you can potentially create a diverse portfolio of individual stocks with just $100. In other words, if you want to buy a stock with a $200 share price, you could use $20 and buy just 0.1 shares. Only a handful of brokerages offer fractional shares, but this option should become more prevalent in the coming years.
Finding stocks for your portfolio can seem daunting, but you can follow some simple principles to help you get started. First and foremost, don't invest in any company with a business you don't understand. By sticking with familiar companies, you'll be better able to tell when they're doing well and when they're doing poorly. Choosing a portfolio of at least 10 or 12 stocks will reduce the risk of big losses if you make a poor choice with one or two of your stock picks, and avoiding stocks that make big moves in both directions is also smart when you're getting started. Over time you'll learn what to look for in company financial statements, and as you learn, you'll be even better able to distinguish strong stocks from weaker ones.
Individual stocks give you a chance to outperform the broader market averages over the long run. When you're talking about years or even decades of holding quality stocks, the benefits of investing in the best companies in the stock market can pay life-changing rewards to long-term stock investors. Even a single share can grow over the years to become worth a huge amount and help you reach your financial goals.
5. Open an IRA
Finally, the type of account you choose to invest in can be even more important than what you choose to invest in. If you're planning to invest $100 per month, you should consider doing it in a tax-advantaged account like an IRA. Either a traditional or a Roth IRA can give you valuable tax benefits.
Using IRAs can produce huge tax savings over the long run. 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 24% tax bracket at retirement, having this money in a Roth IRA could mean $43,200 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 $6,000 into an IRA each year for 2019 and 2020 -- or up to $7,000 if you're 50 or older.
The takeaway is that any of the choices presented here will earn you much more from your $100 monthly investments if you keep them in the right kind of account.
One way not to invest $100
One investing trap to be aware of is investing in penny stocks. If you aren't familiar with the term, penny stocks are typically low-priced stocks of smaller or thinly traded companies. While it may seem logical that tiny companies or stocks that trade for just pennies (or even less) per share have the highest return potential, the reality is that the world of penny stocks is full of fraudulent companies and pump-and-dump schemes (think The Wolf of Wall Street).
In short, if you're asking how to best invest 100 dollars in penny stocks, the answer is "Don't."
So if you've been holding off with your investing, don't wait any longer. Take your hundred bucks and pick one or more of these five ways to put it to work. You'll be surprised what a difference it'll make in the long run.