Investing is one of the best ways to build wealth and reach your long-term financial goals. But when you’re just getting started, you may have a limited amount of money left over each month to save and invest. And unfortunately, it’s easy to think that you can’t get started with just a small amount.
The good news is that you can start investing with less money than you think. We spoke with two investing experts to find out just how much money is needed to invest, what to invest in based on your financial goals, and how to get started.
What to Do Before You Start Investing
Before we talk about how much money you need to start investing, it’s important to back up a few steps and talk about how you know when you’re ready to invest at all. Financial experts generally agree that there are a few financial foundations that should be in place first.
“A couple of things I look for when reviewing a client’s finances before I even start talking about an investment plan are making sure you’ve paid off all high-cost debt — which we classify as anything with an interest rate above 5%,” said Andrew Westlin, a CFP and Senior Financial Planner for Betterment. High interest credit card debt is the most toxic. Try to get rid of that first before you invest. “Also having an emergency fund are two key things to have in place before we start investing.” An emergency fund can help you tackle unexpected expenses should they arise. Experts agree that it’s best to have a 3-6 month emergency savings in liquid cash.
Once you have those financial foundations in place, you can start exploring investing, even if you only have a small amount to work with.
How Much Money Is Needed to Start Investing
You might be surprised to learn that you can start investing with just about any amount of money. Many brokerages require no minimum amount of money to get started. For example, the major online brokerage firms Fidelity and Schwab both have no account minimums.
“Even if you invest only $10 per week or month, make a goal to make it $15 per week or month by the end of the year to build and reach those benchmarks,” said Sara Stolberg Berkowicz, a CFP and Assistant Professor at the College for Financial Planning. “We can build up how much we’re saving as we go.”
Identify Your Investing Goals
One of the most important steps of investing is setting specific financial goals. Having these goals in place can help guide every decision you make, from how much to invest to what to invest in.
“Goal-based investing is something I’m a proponent of,” Westlin said. “Having clearly identified goals helps you tremendously when determining how much you should be investing, what types of investments, or what risk level you should be investing at, and it gives you clear targets and benchmarks to work toward.”
One of the reasons that goal-setting is so critical is because it helps you to establish your time horizon, or the number of years before you’ll need the money you’re investing. In general, the longer your time horizon, the more risk you can take on in your portfolio. Someone in their twenties or thirties who is investing for retirement has a very different time horizon than someone in their fifties or sixties, meaning they require a different investment strategy.
Likewise, your investment strategy for a short-time goal like buying a home in five years is likely to be entirely different from your investment strategy for retirement if it’s decades away. Identifying a specific investment goal makes the rest of the process simpler.
Picking Stocks to Invest In
One of the most challenging parts of investing for the first time is deciding what exactly to invest in. There are countless options available today, and the “correct” first investment is likely to vary depending on who you ask.
“It’s hard to resist the urge to buy cryptocurrency or individual stocks,” Westlin said. “The conversation around a lot of family dinner tables during the holidays is around what hot NFT or cryptocurrency someone is investing in, but that’s not an investment to start with.”
Rather than starting with individual stocks and speculative investments, experts generally recommend a diversified portfolio that provides broad exposure to the market while reducing your risk. The most diversified you are, the smaller the impact a single asset can have on your returns. If you’re just starting off, find a total market fund, like the S&P 500, that spreads out your investments among hundreds of stocks, instead of just single stocks.
Diversifying a Small Portfolio
In the past, it was far more difficult to diversify a small investment portfolio. Mutual funds often had high investment minimums in place, often requiring you to have several thousand dollars to get in. And diversifying your portfolio without a pooled investment was challenging, as it required buying many individual stocks and bonds yourself.
If you’re just getting started with investing and only have a small amount of money to work with, a mutual fund or ETF that provides broad market exposure can help you create diversification.
Luckily, diversifying your portfolio is far simpler today. With an investment into a mutual fund or exchange-traded fund (ETF), you can gain broad market exposure through a single investment. Remember that the specific investment you choose should reflect your financial goals, time horizon, and risk tolerance. If you want to take the guesswork out of retirement planning, consider a target date fund. Target date funds automatically adjust your investment risk as you get older.
Where to Start Investing
One of the most important steps to getting started with investing is deciding where you’ll actually invest. Today, there is no shortage of brokerage firms where you can start investing quickly. NextAdvisor recommends online brokers like Vanguard, Fidelity, and Schwab because they make it easy to open an account online and have a wide variety of investments to choose from.
For investors who prefer a more hands-off approach, a robo-advisor is also something to consider. When you sign up for a robo-advisor like Betterment, Wealthfront, or Ellevest, an algorithm chooses investments on your behalf based on your financial goals and time horizon. This option might be well-suited to investors who don’t know what to invest in and are allowing analysis paralysis from allowing them to take the next step.
Just as it’s important to talk about what company to open an account with, we should also talk about what type of account to open. While a taxable brokerage account is a great option, experts agree that investors take advantage (and max out) all their retirement accounts first, to take advantage of the tax breaks associated with them. For example, a Roth IRA.
“I do recommend that, especially for young people, that they consider their first investment to be in a Roth IRA account,” Berkowicz said. “They provide for tax-free distributions, both during the lifetime of the contributor and for their heirs.”
A Roth IRA can be a great option for everyone from the teenager working a few hours per week to earn money to the professional who is ready to take investing more seriously. And for those who make more income than the Roth IRA allows, a traditional IRA also allows investors to save for retirement in a tax-advantaged way.
Consistency is Key
When you first start investing, especially if you only have a small amount of money to work with, it’s easy to feel that it’s not enough money to make a difference. But just being consistent and building that important habit of investing is life-changing.
Experts also agree that setting up monthly automatic payments to your retirement accounts or taxable brokerage accounts helps tremendously. When you set up an automatic transfer to your investment account each month, you don’t have to think about it. Since you aren’t manually making the deposit each month, you don’t feel as if you’re giving anything up.
Don’t forget to keep checking your investments. Make sure that your money is being invested, and is not just sitting there, and make phone calls to your providers and ask questions. Many companies have a 24/7 customer service line that you can call and check in on your money.