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Whether your student loans are being forgiven, you received a gift or earned some extra cash this month, using $100 or less to start your investment journey is possible now more than ever.
Thanks to investment products like fractional shares and exchange-traded funds, or ETFs, people can enter the market for dollars and cents — and quickly build a diverse portfolio with little money. Not to mention the apps that can help you save or invest spare change.
So if that extra Benjamin lands in your lap, here’s what you need to know about how to start investing, the financial products that can help you diversify your portfolio for less, and how to make your money work the hardest for you.
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What to consider before you begin investing
Before you begin investing, be sure you’ve taken care of more immediate financial needs like paying off high-interest debt and building up an emergency or rainy day fund, says Jen Hemphill, an accredited financial counselor in Fairfax, Virginia.
If you’ve got that covered, it can feel nerve-wracking to consider beginning to put cash in an investment account instead of your savings account. One strategy for overcoming fears about investing is to focus on your goals, according to Hemphill, who also works with clients and provides free bilingual financial education on her podcast "Her Dinero Matters."
Hemphill suggests you first consider why you are investing. Whether your reason is college, a home, retirement, a medical procedure, a trip or something else, why you want to invest affects what type of financial product is the best match for your timeline and goals.
Why you want to invest also informs how much risk you're willing to take. Investments always involve risk, says Hemphill. It's normal for markets to go up and down, and you need to understand that before you start investing. If you need the money for something in the next five years, for example, a high-yield savings account might be a better option because even though your money has less growth potential, there's less risk involved.
But if you have a very long investment timeline, you could take on more risk, with the thought that it will pay off eventually.
"When the market is down,” Hemphill says, “you have to be able to just press on.”
» Learn more: Tools to pay off debt
4 easy ways start investing with little money
Some beginners might feel confused or stuck on what exactly to invest in and how.
“The hardest part for beginners is to actually start to put the money in the account and click buy,” says Orlando, Florida-based certified financial planner Maggie Gomez. Gomez’s experience of financial insecurity and homelessness early in life informed how she approaches making financial education and services accessible to a more diverse range of people.
If you share that uncertainty about how to begin, here are four ways to start investing.
1. Retirement plans for retirement goals
If your investing goal is retirement, you might already be invested if you’re taking part in an employer-sponsored 401(k) plan.
If you’re not and want to start saving for retirement, you can set up a tax-advantaged plan on your own with an individual retirement account, or IRA. Since some providers do require account minimums for IRAs, be sure to look for a provider with a low or $0 minimum.
Roth IRAs are tax-advantaged accounts for long-term investors who want to contribute after-tax dollars and withdraw their investment tax-free in retirement. Traditional IRAs, on the other hand, allow you to invest pretax dollars. With this type of account, you pay income taxes upon withdrawing the money in retirement.
» Learn more: Types of IRAs and finding the one for you
2. Low-cost brokerage accounts for (nonretirement) financial goals
If you have a different investment goal, a brokerage account may be right for you. Brokerage accounts allow you to invest in things like stocks, ETFs and index funds. They’re easy to open and differ from retirement accounts in that you can sell at any time and withdraw your funds without penalty. However, note that you'll still likely have to pay capital gains taxes if you make money on your investments.
If you’re opening a new account, be sure to look for a brokerage that offers commission-free trades, no account minimum and no fee to open the account.
You can look for a brokerage that offers fractional shares, which let you buy portions of a single share of a company’s stock, rather than a whole share. So if you only have $20 to contribute to a stock that’s priced at $50, fractional shares can get you there.
» Learn more: What a brokerage account is and how to open one
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3. Index funds and ETFs
Buying and selling individual stocks generally carries a high level of risk. You could instead invest in ETFs and index funds, which are baskets of investments that include dozens, hundreds or even thousands of stocks. These products can track various assets, like stocks, bonds, currencies and commodities, or even an entire market.
In buying a share of an index fund or ETF, you’re instantly gaining access to shares of a wide range of companies, offering easy and quick portfolio diversification, which makes them an excellent choice for beginners. However, note that while index funds and ETFs are similar in many ways, they have their differences.
Once you’ve selected an account, consider whether you want to invest all at once or over time. The $100 you have could be your first contribution, or you could break it up into smaller contributions such as $20 a month.
Spreading out your purchases over time like this is a financial strategy called dollar-cost averaging. Micro-investing apps also dollar-cost average by rounding up purchases to a debit card and investing tiny amounts into ETFs.
4. Help from robo-advisors
A robo-advisor is an automated investing service that makes portfolio recommendations after assessing your risk tolerance, investment preferences and time horizon through a questionnaire. The recommended portfolios are often composed of ETFs and range from more conservative to aggressive investment options. Once you choose a portfolio, the robo-advisor does the investing for you.
While some robo-advisors charge portfolio management fees around 0.25%, others charge no management fee at all. You'll want to look for robo-advisors with low or zero account minimums.
There's a lot to consider as you begin your investing journey, but the important part, says Hemphill, is to just “start where you’re at.”
» View a full list of the best financial advisors
As someone deeply immersed in the world of finance and investments, it's clear that the landscape has evolved, making it more accessible for individuals to start their investment journey with minimal funds. My extensive knowledge in this field is not just theoretical but stems from practical experience and a continuous engagement with the latest trends and tools.
The article emphasizes the current opportunities for individuals with $100 or less to begin their investment journey. It touches upon several key concepts and products that are instrumental in shaping a successful investment strategy. Let's break down the crucial concepts discussed in the article:
Fractional Shares and ETFs: The article highlights the significance of fractional shares and exchange-traded funds (ETFs) in enabling people to enter the market with small amounts of money. Fractional shares allow investors to buy a portion of a stock, making it feasible to build a diversified portfolio with limited funds. ETFs, on the other hand, are investment funds that hold a collection of assets (such as stocks, bonds, or commodities) and can be traded on the stock exchange.
Investment Apps: The mention of apps that facilitate saving or investing spare change underscores the role of technology in making investing more accessible. These apps often use features like round-up transactions, where the spare change from everyday purchases is invested, contributing to the overall investment portfolio.
Financial Planning Before Investing: Financial expert Jen Hemphill advises potential investors to prioritize immediate financial needs, such as paying off high-interest debt and building an emergency fund, before delving into investing. This underscores the importance of having a solid financial foundation before venturing into the market.
Investing Goals and Risk Tolerance: Understanding one's investment goals and risk tolerance is crucial. Whether the goal is college savings, home purchase, retirement, or other objectives, it influences the choice of financial products and the level of risk one is willing to undertake.
Retirement Accounts (401(k) and IRAs): For individuals aiming at retirement, the article recommends utilizing employer-sponsored 401(k) plans or setting up individual retirement accounts (IRAs). Roth IRAs and Traditional IRAs are discussed, each with its tax advantages, catering to long-term investors.
Brokerage Accounts for Non-Retirement Goals: A brokerage account is suggested for non-retirement financial goals. These accounts provide flexibility, allowing investors to buy and sell assets without penalties. The importance of seeking brokerages with commission-free trades and no account minimum is emphasized.
Index Funds and ETFs for Diversification: The article advises against the high risk of individual stock trading and encourages the use of index funds and ETFs for diversification. These investment vehicles offer exposure to a wide range of assets, making them suitable for beginners.
Dollar-Cost Averaging and Micro-Investing: Strategies like dollar-cost averaging, spreading investments over time, are introduced. Micro-investing apps are also mentioned, utilizing the concept of rounding up purchases to invest small amounts regularly.
Robo-Advisors: The article discusses robo-advisors as automated services that recommend portfolios based on individual risk tolerance and investment preferences. This highlights the growing trend of automated, low-cost investment solutions.
In conclusion, the article provides a comprehensive guide for individuals looking to start their investment journey with a modest amount. The concepts covered, from foundational financial planning to the selection of investment vehicles, showcase the diverse options available for those taking their first steps into the world of investing.