You Can Begin Investing Today With as Little as Five Dollars
If you have survived the economic downturn, you may be happy just to be paying your bills on time. Investing for your future might not even be on your radar and many folks assume that if they do not have large amounts they should not even bother. However, did you know it is possible to invest with very little money, as little as five dollars? Every little bit counts and now is an ideal time to begin investing small amounts, and you won’t even feel the pain.
Invest in a 401k
No matter what the current financial market is doing, most financial experts advise folks to invest in a 401k if their company offers one. Luckily, only a small amount is needed to invest in a 401k, and the amount is deducted from your paycheck automatically. In fact, it isn’t uncommon to allow minimum contributions of one percent, or even just five dollars per paycheck.
Some companies offer a matching amount that they will contribute to your plan as well. This is essentially free money. You make a contribution, and they turn around and match that contribution in part or entirely. If your place of employment offers this option it’s a no-brainer to take advantage of it.
The other benefit of using a 401k is that contributions are pre-tax. This means you don’t pay tax on the money that you contribute, and instead only pay taxes on withdrawals from the plan at a future date. To put it a different way, imagine you began contributing ten dollars per paycheck into your 401k. Your paycheck would actually only be about eight dollars less than usual due to the fact the entire contribution is not taxed, so you save about two dollars in taxes.
Don’t worry about losing the money in your 401k if you quit or are laid off. The money is still yours and you have a number of options. The best option is usually to do a 401k rollover which allows you to move your funds from your retirement plan into an IRA that you control.
DPP or Direct Purchase Plans
Direct Purchase Plans, or DPPs are ideal for folks who want to invest in the stock market but do not have large sums on hand. By using a DPP, you can avoid using a brokerage firm that can become costly when you make a lot of small transactions or don’t meet account minimums.
Direct Purchase Plans enable you to purchase stock directly from the company. There are usually no fees associated with this, or if there are, they are minimal. And unlike purchasing stock through a brokerage account where you are required to buy whole shares, the DPP typically allows you to purchase fractions of shares which is how they allow you to get started with very little money
The downsides to DPPs are that not all companies offer the plans, and it’s also a little harder to diversify since you’re dealing in individual stocks. But if you don’t mind taking the time to find a good company you’d like to invest in it can be a great option.
Investing In ETFs
ETFs are exchange-traded funds that are purchased in the same way as stocks. They can be purchased throughout the day, as their price is not set at the end of the day like somewhat similar open-end mutual funds. ETFs can track a specific industry, country or regional stocks, or they can cover broad based indices.
ETFs don’t require much day-to-day management, which is why the fees associated with them are relatively low. They also have lower ongoing operating expenses. This is one of the reasons they are ideal for long-term investment portfolios as well as short-term trading.
The minimum amount required to invest in an ETF is simply the share price plus any brokerage commission on the trade. If an ETF is trading at $25 a share and your broker charges you $4.95 to place a trade you could invest with just $30.
The drawback to ETFs is that if you are with a broker that charges a commission on each trade it can get costly to make frequent small purchases. The good news is that many brokers have a selection of no-transaction fee ETFs that you can trade without paying commission.
One good thing about ETFs is that unlike using a DPP that only invests in a single stock, you can purchase one share of an ETF and are instantly diversified. And with thousands of ETFs to choose from you can create a well-rounded portfolio.
Low Cost Brokerage Firms
If you feel you want to have the ability to invest in many different things such as stocks, bonds, ETFs, and mutual funds, a discount broker may be the ticket. There are many discount brokerage firms online, and some of them allow a small, or even no initial deposit to open an account. Once you put money in the account you’re free invest in virtually anything you want, from individual stocks and bonds to ETFs and mutual funds.
Individual Fund Companies
Finally, if you’re low on cash but still want to get started investing, you may want to look at investing with a specific fund company. Two great low-cost companies are Fidelity and Vanguard. They offer some of the most affordable funds out there.
When investing in an individual fund you will need to pay attention to the minimum investment required. Each fund is different and the amount needed to get started can be as low as $250 or as high as $10,000. But once you make the initial investment you can usually continue to invest with as little as ten dollars.
The great thing about investing in a fund directly is there typically isn’t a transaction fee or commission for making purchases, so you’re free to add money to the account as often as you’d like without worrying about being hit with transaction fees.
The drawback is that some of the better funds do have higher minimums so it can take a little time to come up with the money to purchase the funds you’re interested in.
Learning How to Invest
Now that you’ve found a number of ways to start investing where do you turn to learn how to put that money to work? Well, for starters, you can download my free Invest Like a Pro eBook. In the book you’ll learn:
- Learn how funds charge fees and how to minimize them.
- Learn how to use Morningstar to research and compare investments.
- Learn about asset allocation, correlation, and true diversification.
- Learn how and when to rebalance your portfolio.
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.