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Investing

Here’s why you shouldn’t shy away from investing, even if you only have a small amount of money

It can feel pointless investing a small amount of money, but even tiny moves can lead to growth.

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Robert G. Allen, author of several best-selling personal finance books once asked, "How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case." 

Using a savings account and an emergency fund for short-term expenses is important, but investing for retirement and the future is arguably just as crucial. While it may feel pointless to start investing if you don't have much money, it can still be incredibly worthwhile. Think of it this way: few, if any, start investing with a large sum of money. For many, growing your wealth happens over years and years and is a slow and steady process.

By starting slow, even with a small amount of cash, you can begin to establish the habit of investing regularly, which will hopefully lead to a large nest egg in the future.

Select details why you should start investing today, even if you don't have a large amount of money to start with.

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Why you should start investing today

Investing can be an intimidating word and concept for many reasons. There are a large amount of terms, tax implications, planning and investments to understand — along with knowing there will be market fluctuations making your net worth go up and down. But by understanding the mere basics, you can begin to grow your wealth quickly.

Corbin Blackwell CFP, senior financial planner at wealth management app Betterment, told Select that, "Investing is one of the best ways to grow your long-term wealth and reach major goals for things like retirement, buying a home and college funds."

She also said that beginning the investing journey is often the most difficult part, as growth will be limited at first. He added that, "Tools available today, like digital investment advisors, make it easier than ever to get started."

And by getting started today, you have the best asset that any investor can have on their side: time.

By letting your money sit in the market longer, you allow for compound interest to take over — which is when your interest and gains stack on top of one another. Blackwell gives an excellent example of the power of compound interest:

"Let's say you invested just $100 today and saw a 5% annual return – thanks to the power of compound interest, if you don't touch your investment, in 30 years you'd have $430."

That's an ok return, but imagine if you invested $100 monthly for 30 years into a common index fund. An index fund is a fund that has a group of companies within it, and tracks the performance of the entire group. These groups can range in focus including the size of each company, the respective industries, location of the companies, type of investment and more. One of the most popular indices, the S&P 500, consists of the 500 largest companies in the United States, making it a relatively safe investment because of its exposure to hundreds of companies and dozens of industries.

Many consider this a 'boring investment,' but the results the index has produced are nothing to balk at.

The average yearly return of the S&P 500 over the last 30 years is 10.7%, but even at a conservative return of 8%, you would have over $146,000 if you invest $100 a month for 30 years. The impressive part is that your total contributions would be $36,000, which means your money would have quadrupled in value in 30 years (note that past performance does not guarantee future success).

In short, the more money and more time you have in the market, the more likely you are to grow your investment funds.

How to begin investing

If growing your net worth is your goal, you can get started in just a few minutes. Here are a few things to consider:

Build a budget that works for you

Starting to invest with a small amount of money isn't an issue. However, it's important to know how much you can afford to invest, as you don't want to harm your personal finances in the process. Blackwell urged, "as long as you aren't using money [to invest] that you need to cover day to day expenses such as food, rent and high interest debt payments, I recommend you start investing."

A budget gives you a way to see where your money is going each month, where you can possibly cut back and how much you can invest each month. You can set up a budget for yourself using a budgeting app, a spreadsheet or even a simple pen and paper. I use Empower (formerly Personal Capital) to manage my budget because I'm able to track my expenses and monitor the performance of my investments in one convenient app.

Regardless of which budgeting method works best for you, it's important to have an established budget to understand how much you can invest each month without cutting into the money allocated towards your monthly essentials.

Select an investing "bucket" and investments

There are many different buckets you can fill with money, such as a Roth IRA, HSA, 529 or taxable brokerage account. Each of these accounts serve a different purpose and have different tax implications, so be sure to select one that makes sense for you. For example, a Roth IRA is great if you plan on being in a higher tax bracket when you retire — you'll contribute after-tax income but all gains are tax-free after 59 and a half years old.

Once you select the type of account you want to invest within, you then must decide what type of investment to put your money into. This is the puzzling part for many, as there are an abundance of options, from ETFs to viral meme stocks to index funds and many more in-between.

For long term investors, index funds are a great solution as they have low fees, are low maintenance, provide wide exposure and many provide stable returns. In fact, John Bogle, the founder of Vanguard, summarizes the effectiveness of index funds in one analogy: "Don't look for the needle in the haystack. Just buy the haystack."

Regardless of which investment you choose, it's important to evaluate your risk-tolerance and understand what you're investing in. Be sure to do your own research, and potentially connect with an accredited financial advisor to discuss the best options.

Automate your investing

Once you determine how much you can and want to invest each month, it's important to turn on auto-investing.

This is where money is taken out of your checking account each month and automatically deposited into your choice of investments. Choosing this option is important because it takes the leg work away from needing to invest each month. Additionally, studies show that we are built for 'present bias' — which is the idea that the farther away something is, the less important it is. Essentially, it's much easier to spend now, rather than save for later. Automating transfers from your checking account or paycheck into an investment account will help ensure you don't spend money that you were planning on investing.

By automating your investments, you will be passively growing your nest egg and getting yourself closer to reaching your financial goals.

You may also want to consider a robo-advisor like Betterment or Wealthfront. Robo-advisors work by gathering information from you on your financial situation and investing goals to suggest investments that fit your needs and risk tolerance. After supplying this information, the robo-advisor will build you a portfolio based on your answers through computer algorithms and advanced software, with little to no work on your end. Plus, it will rebalance your investments over time based on your goals and changes in the market.

Best brokerages to get started

To begin investing, you'll need to select a brokerage account provider. These brokerages serve as the intermediary between you and the seller of the stock or security you want to purchase.

When deciding on the best brokerage for you, be sure to consider these factors:

  • Fees: These can range from minimum deposits, stock trade fees, mutual fund trade fees and more. Be sure to select a no- or low-fee brokerage.
  • Ease of use: Each brokerage has a different website and mobile app. While this is much more subjective, it's advantageous to use a brokerage with a web interface and experience you understand and enjoy.
  • Promotions: From time to time, brokerages will offer bonuses to new users. For example, I recently signed up for a Fidelity brokerage account and earned a $100 bonus after depositing $50.

Below are a few of our favorite online brokerages:

Fidelity Investments

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a Fidelity Go® account, but minimum $10 balance for robo-advisor to start investing

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF, options trades and some mutual funds; zero transaction fees for over 3,400 mutual funds; $0.65 per options contract. Fidelity Go® has no advisory fees for balances under $25,000 (0.35% per year for balances of $25,000 and over and this includes access to unlimited 1-on-1 coaching calls from a Fidelity advisor)

  • Bonus

    Find special offers here

  • Investment vehicles

    Robo-advisor: Fidelity Go® IRA: Traditional, Roth and Rollover IRAs Brokerage and trading: Fidelity Investments Trading Other: Fidelity Investments 529 College Savings; Fidelity HSA®

  • Investment options

    Stocks, bonds, ETFs, mutual funds, CDs, options and fractional shares

  • Educational resources

    Extensive tools and industry-leading, in-depth research from 20-plus independent providers

Terms apply.

Pros

  • No commission fees for stock, ETF, options trades
  • No transaction fees for over 3,400 mutual funds
  • Limited-time special offers
  • Abundant educational tools and resources
  • 24/7 customer service
  • Over 100 brick-and-mortar branches across the U.S. for face-to-face support

Cons

  • Fidelity Go® has a 0.35% advisory fee per year for balances of $25,000 and over
  • Some of Fidelity's mutual funds require reaching specific thresholds
  • Reports of platform outages during heavy trading days

TD Ameritrade

  • Minimum deposit and balance

    Minimum deposit and balance requirements may vary depending on the investment vehicle selected. No minimum to open a TD Ameritrade brokerage account; minimum $25,000 investment for managed Selective Portfolios and minimum $250,000 investment for managed Personalized Portfolios

  • Fees

    Fees may vary depending on the investment vehicle selected. Zero commission fees for stock, ETF and options trades; zero transaction fees for hundreds of mutual funds; Managed Portfolios charge annual advisory fees: 0.75% to 0.90% for the first $100,000 for Selective Portfolios and 0.60% to 0.90% for Personalized Portfolios (for both, fees vary by portfolio and investment amount)

  • Bonus

    None

  • Investment vehicles

    Most similar to robo-advisor: TD Ameritrade Managed Portfolios IRA: TD Ameritrade Traditional, Roth, Rollover, SEP and SIMPLE IRAs Brokerage and trading: TD Ameritrade Trading Other: Solo 401(k) and Pension or Profit Plan

  • Investment options

    Stocks, bonds, mutual funds, ETFs, options, IPOs, futures, forex, margin and crypto trading

  • Educational resources

    Interactive courses and webcasts

Terms apply.

Pros

  • Excellent customer service
  • Intuitive trading platform
  • Large selection of mutual funds

Cons

  • Some mutual funds charge high commissions
  • Free research may not all be relevant to novice investors
  • Doesn’t offer fractional shares of stocks

Vanguard

  • Fees/commissions

    $0 

  • Account minimum

    $0

  • Investment options

    Stocks, bonds, ETFs, mutual funds, options, CDs

Pros

  • Excellent customer service
  • One of the largest ETF and mutual funds offerings around
  • Large number of no-transaction-fee mutual funds

Cons

  • $20 annual fee for IRAs and brokerage accounts, though investors can waive this fee by opting into paperless statements
  • Basic trading platform only
  • No robust research and data tools

Bottom line

When starting with a small amount of money, investing for the future can seem nearly pointless. But with a strategy in place, even small amounts today can grow into a large nest egg over the long-run.

Before investing, you should ensure you have a fully-funded emergency fund, as well as all high-interest debt paid off. Once you have that foundation in place, investing can help you accomplish your short- and long-term financial goals.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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