Intro – What Do I Need to Know Before I Start Investing?
Mention the word investing, and many of you would instantly think of men in suits.
A lot of people would assume that you will need a lot to get started with an investment That is not the case! Even with a few dollars to spare, you can find an attractive investment.
Before you invest, you should know that not all investments are the same. Different investment instruments are available, each with a different yield.
While it is true that the returns are higher when the risks are higher, this does not mean that you need thousands of dollars to launch your first investment.
However, regardless if you invest a small amount, remember one thing – there are risks involved.
The better you understand the risks, the higher is the chance that your investment will have favorable outcomes.
If you want to know more about how to start investing with little money, keep on reading and learn from the insights we’ll share in this post.
Is it Really Possible to Start Investing with Little Money?
YES, it is possible to start investing with little money!
Even with $25 to start with, you can venture into a promising investment.
The yields will be small, but that is understandable.
You gt to start small and eventually go big once your investment starts making money.
The secret to success is to be smart about where to put your money.
The possibilities are endless, but not all of them can promise the outcomes that you envision.
Ideal Ways to Invest Small Amounts of Money
Curious about how to start investing with little money 2020? We got you covered!
Below, we’ll talk about some of the best investment instruments worth considering.
Even if you are a newbie, there’s no need to worry. They are quite straightforward to learn.
High-Yield Saving Accounts
A high-yield savings account is one of the best ways to invest small amounts of money.
It is a type of deposit account with a higher interest rate compared to a traditional savings account. The interest rate can range from 1% to 2.2% depending on the bank. In contrast, a savings account has an approximate interest rate of .10%.
Check with your current bank if they are offering high-yield savings accounts. Things can be simpler since they already have your records.
Otherwise, look at other options. Online banks are some of the best, especially because you can complete your application without visiting the bank’s physical location.
When deciding on the best high-yield savings account to choose, consider a variety of factors. Think about the interest rate, minimum initial deposit, minimum maintaining balance, and transaction fees, among other things.
Robo-advisors make investing for beginners with little money a breeze. This is an automated technology that can entice investment newbies.
A robo-advisor is a software that manages your financial investments without the need to consult with a professional.
You start by opening a robo-managed account and provide basic information. You will fill-up an online questionnaire, which will make it easier for the robo-advisor to understand your investment goals. You will then automatically receive advice on the best approach to investment. There will be automated and advanced algorithm services that are completed without human supervision.
One of the best things about robo-advisors is that they have low opening balances. Plus, they are easy to use. You can leave your account and the robo-advisor will do most of the work for you.
However, there are also some drawbacks. For instance, it won’t work for people who need a customized approach or those who have multiple investment accounts.
If you are looking for robo-advisors, below are the top options that should be on your list.
- Wealthfront: The company promises to grow your savings faster. This is possible with their .26% APY, which is higher than the .09% national average. It is also FDIC-insured up to $1 million. You can do unlimited transfers at zero charges. This is perfect for investing with little money because the minimum requirement to open an account is only $1 and there are no additional deposit requirements.
- M1 Finance: The company claims that they are trusted by more than 100,000 investors and that they have already managed funds of at least $1 billion. You can create a core account for free, which comes with perks like no trading commissions and no management fees. There is no minimum starting balance but if you want to start investing, you need at least $100 in your account.
- Betterment: With this robo-advisor, you can enjoy intelligent functions, such as smart rebalancing, automatic depositing, reinvesting dividends, and tax loss harvesting. The annual fee is .25% or $25 for every $10,000 investment. They have no minimum starting balance. The best thing is that they offer a satisfaction guarantee.
When looking for the best way to start investing with little money, you should also consider investment apps.
The best thing about investment apps is that they are easy to use. All that you need is to download the app, and from here, you can manage your small investments.
Most apps will have a seamless interface, so you won’t end up having a frustrating experience.
- Acorn: This app allows you to invest with your spare change and watch your money grow. Through Acorn Invest, you can set up a micro-savings account in less than five minutes. More than $1 billion investments have been accumulated so far! Your investment will be diversified in over 7,000 stocks and bonds where the investors will earn a fraction of the earnings. You can start an investment with only $1 per month. There are no trade fees. It uses 256-bit encryption, making sure that your money is in a secure platform.
- Clink: Save One Dollar a Day – that is the tagline of Clink, which is another app perfect if you want to invest with little money. There is no minimum investment requirement. Clink has a diverse investment portfolio, which includes Exchange-Traded Funds. There is a flat monthly fee of $1 per month if your account balance is less than $5,000. Otherwise, the fee is .25%.
- Stash Invest: Stash has more than 4 million investors, and 86% of them are first-time investors. It has accumulated more than $1.8 billion in investments. You can invest in more than 400 stocks without trading commissions. You can create a beginner account for a fee of as low as $1 per month, which is inclusive of free financial education. With as low as $1, you can invest in a fractional share of commonly traded stocks.
- Robinhood: With Robinhood, you can enjoy commission-free investments. You can make unlimited trades in funds, stocks, and other instruments without the need to pay commissions. You can invest any amount you wish and expect to earn .30% APY. They have a streamlined interface that will be easy for any new investor to use. One thing that makes it unique is that there is also cryptocurrency trading.
- Stockpile: This investment app does not have account minimums or monthly fees, making it another great choice when it comes to the best ways to invest small amounts of money. However, there is a $.99 fee per trade. With as little as $5, you can start buying fractional shares of more than 1,000 stocks and exchange-traded funds. This brokerage is unique because there is an option to give a gift card that can be exchanged for a redeemable stock.
- Public: If you are looking for a commission-free stock investment app, this is another option that should be on your list. You can own slices of stocks with as low as $5. You can also have peace of mind since it is SIPC-insured up to $500,000. One thing that makes Public different from other investment apps is that it has a social layer. This means that you can connect with other investors, which is also one way by which the company promotes transparency.
As you discover the different ways of how to get into investing with little money, don’t forget to consider funds.
An investment fund is a pool of capital from several investors. You will have partial ownership of the fund, along with other investors. The earnings of these funds will be divided amongst the investors depending on your share.
Here are some of the most common types of funds perfect for investing for beginners with little money:
- Target-Date Mutual Funds: A popular choice among retirement investors, it is a set-and-forget investment fund. It controls asset allocation to reach the anticipated fund goal as it reaches the year of maturity. Aside from having a low minimum investment, it also requires low maintenance and you will have professionals to manage the investment portfolio. However, there is a lack of diversity and expenses can go up.
- Index Funds: This type of investment fund tries to contain all the securities in a specific basket. They are known for being among the most diversified investment vehicles in the market.
- Exchange-Traded Fund: It is a “basket of securities that tracks an underlying index.” It can include bonds, stocks, and commodities. When you buy an ETF, you don’t select security. Instead, you will pick an asset class. It tends to be a cheaper option compared to mutual funds. It is also more tax efficient.
Is it better to invest in mutual funds, ETFs or index funds?
Deciding which to choose from the three is a difficult decision. We leave it up to you to pick which one is most suitable for your needs.
To help you decide, let’s quickly look at their advantages.
For target-date mutual funds, they have low minimum investments and low maintenance. It is also simple and there is something for everyone.
Meanwhile, for index funds, you can expect low costs, solid returns, and broad diversification.
Lastly, for exchange-traded funds, the benefits include low costs, instant diversification, tax efficiency, and liquidity.
As you can see, the three investment funds share almost the same characteristics. The devil is in the details, so make sure to research properly before you decide.
If you are a first time investor with limited financial resources, treasury securities hold a lot of promise.
This is by no means a make-me-rich-quick type of investment. Rather, it is a good way to park your money for a while, let it earn interest, and eventually venture into investments with higher returns.
Also called saving bonds, treasury securities are government-backed investment instruments. These are debt obligations. Meaning, when you buy treasury securities, you are lending money to the federal government for a specified period. In turn, this money will earn interest.
The best thing about treasury securities is that there are virtually zero risks. You are lending money to the government, so it is unlikely that they will default on the payments.
If you want to get started with treasury securities, be familiar with the types available and pick one that is most suitable for your needs.
- T-Bills: Of all government funds, this has the shortest maturity, which is a year or less. The maturity dates are set at four, eight, 13, 26, and 52 weeks. It is available in capital and money markets. They are auctioned to investors at a discount to par or face value. The interest earned will be the difference between the par value and the discount price settled during the purchase.
- T-Notes: They have maturities of two to the years. Interest payments are given twice a year. It is auctioned by the U.S. Treasury and can be bought in increments of $100.
- T-Bonds: These are long-term investments with maturities ranging from ten to 30 years. Fixed-interest payment is received every six months. It also has the highest interest rate of the three. They are also sold in auctions by the U.S. Treasury at increments of $100.
Peer to peer lending
If you are still thinking of how to get into investing with little money, then peer-to-peer lending is another option worth considering.
Also called P2P lending, it is a “form of online lending that allows individual investors to work directly with people or businesses seeking loans.” It leaves financial intermediaries out of the picture, including banks.
One of the most important components of peer-to-peer lending is a website, which acts as a platform that connects borrowers and lenders.
The interest rate will differ based on the platform that you will choose. It isn’t uncommon, however, to find websites boasting 10% to 12% interest rates.
A potential problem with peer-to-peer lending, however, is when the borrower stops paying. The loan may default, and you will not get your money back.
If you want to lend money, the process is quite simple. Here are the things that you need to do:
- Choose a peer-to-peer lending platform and create an account.
- Review loans available on the platform. Choose loans that you would like to fund. Some platforms will provide a loan score, making it easier for you to choose.
- Alternatively, some companies offer an automatic investment feature, which makes things easier for you.
- Watch your money grow. Payments, including interest, will be deposited on your account based on a pre-determined schedule.
Q: What is the best investment for me?
A: It is best to start with investment apps. There plenty of choices, each offering a seamless platform. Some would even allow you to invest with only $1. You don’t need to monitor your investment closely. You will be investing in fractional shares and you can watch your money grow.
Q: When is the best time to start investing?
A: The best time to start investing is today, regardless of your age! The sooner you invest, the more your investment will compound or yield.
At this point, we hope that you were able to learn a thing or two when it comes to the best way to start investing with little money.
It isn’t up to us to decide which one is the best choice for you.
From high-yield saving accounts to peer-to-peer lending, many investment instruments are worth considering.
The most important is to do your research, especially when it comes to the minimum investment requirement and the expected yield.
Keep your expectations low. Because you are investing with a small amount, expect that the return will not be as massive as high-risk investments.