Everyone who has been exposed to any sort of financial education or who has ever considered investing has heard the adage that it is better to start investing sooner rather than later.
Thanks to the laws of compound interest and reinvestment, it has long been an accepted financial truth that even small investments made early and left to mature over time will ultimately reap more monetary gains than bigger investments made years later.
Unfortunately, many potential investors labor under the misconception that they cannot begin investing yet because they do not have enough money. Misinformation about what it takes to start investing, how much investing costs over time and a lack of information about the options available to small investors can prevent potential investors from making the most of their money for years. Many investors never manage to catch up to where they could have been if they had known how to start earlier. Fortunately, it does not have to be that way. Numerous options exist to help small investors find start-up cash and begin applying it in productive ways right away.
Before potential investors dig into the details of what money they intend to invest and where, it is essential that they take a moment to think seriously about why they want to invest. Specifically, investors should consider:
The answers to these questions will form the foundation of an investor’s financial decisions and strategies. Investors are free to set any personal goals they choose. However, new investors should expect that the larger and shorter-term their goals are, the more aggressively they will need to invest (i.e. the more risks they will need to take) to meet those goals within their desired time periods. Smaller or longer-term goals offer investors more flexibility.
Likewise, investors should assess their financial situation before setting goals. While new enthusiasts may be keen to start investing immediately, they should ensure they have the capital not to run into financial trouble if their investment does poorly.
Investors do not need a lot of money to get started investing, but they do need some. Figuring out where to find those funds can feel challenging, especially for investors who are young or juggling other serious costs such as school loans and mortgages. Fortunately, there are many creative ways for investors to pull together the money they need to get started.
Tax Returns: Not everyone receives a tax return, but many potential investors can expect a to get a healthy sum back from their state or the federal government when tax time rolls around. For most taxpayers, tax returns are a sort of “free money.” Instead of spending it on a new television or other splurge, investors can use that money as a foundational investment. If the tax return amount is not enough by itself to purchase the types of investments and investor wants, then it can be rolled into a savings account dedicated to saving up enough funds to invest.
Employer Contributions: Many employers operate matching programs under which they will match employees’ contributions to their retirement plans up to a certain amount. Since 401(k)s and other retirement savings plans typically involve mutual funds and other investment tools, participating in matching programs can be an excellent way for investors to instantly double the amount of money they are investing. To maximize this opportunity, investors should routinely invest the full amount that their employers will match each fiscal year.
Saving Apps: Investors can take advantage of numerous banking features and independent finance apps to help them save tiny amounts of money daily. For example, several apps exist that automatically round credit and debit card transactions up to the next whole dollar. The extra cents between the actual transaction cost and the rounded total are immediately deposited in a savings account. Many banks offer similar services that redirect money from transactions or directly deposited funds according to the rules investors select.
Gifts and Bonuses: Birthdays. Christmas. Annual Reviews. Many investors can expect to receive additional injections of cash periodically throughout the year in the form of holiday gifts or bonuses at work. Like tax returns, these windfalls are easily squandered. But by planning ahead, investors can dedicate these funds to investing and earn powerful returns on their investment.
Dividends: One of the easiest ways for investors to increase their invested capital is to automatically reinvest any gains or dividends they earn from their initial investments into new investment tools. Although dividends may be modest early on, the compounding nature of this habit can help investors grow their assets rapidly over time.
To truly make the most of their opportunities, investors can combine these tools. For example, they might apply their tax return to their 401(k) and earn matching funds from their employers. Or they might deposit their annual bonus check into the account accruing money from a savings app to build up their store of investment funds until they are ready to make their next stock or bond purchase.
New investors can be overwhelmed by the idea of trying to build a balanced portfolio that meets their personal needs and goals with only a handful of dollars to invest. But a suite of beginner-friendly investment tools exists to help new, small-budget investors make the most of their investments.
Automated Investment Apps: Investors no longer need to spend large sums of money for professional investing advice. Instead, they can use free or low-cost apps to determine the best financial tools and investments for their needs. Apps can offer advice on what kinds of securities to explore, which companies have the best credit ratings and other relevant topics that can help beginners avoid rookie mistakes.
Stock Screeners: Stock screeners are tools that allow investors to sort stocks by a variety of criteria. This makes it easy for investors who want to manage their own portfolio to find stocks that meet their needs without spending hours on research.
Target Date Funds: Target date funds do the work of managing long-term decisions about risk and return for investors. Investors simply determine how much money they want to have saved by retirement and when they want to make it by. They then regularly contribute money toward the fund. Fund managers do the rest, adjusting the types and risk levels of the fund’s securities to maximize growth early on and security as the target date grows closer.
Mutual Funds and Exchange-Traded Funds: Mutual funds and exchange-traded funds allow investors to purchase shares of existing, diversified, professionally managed investment portfolios. Investors can often buy into these benefits with very little money. As they have more funds to invest, they can progressively buy more shares. These types of funds can be ideal for investors who lack the time or interest to research and select stocks, bonds and other investment tools themselves.
Index Funds: Like mutual funds and ETFs, index funds allow investors to buy shares in an established fund for a relatively low cost. Unlike the others, dedicated fund managers do not actively manage index funds. Instead, their portfolios simply consist of all of the investments in a given index. For example, the fund might hold shares from every company on the S&P 500’s list. Index funds generally have modest, stable returns and low fees making them perfect for many new investors.
All investors, but particularly new investors and those on a budget, should be aware of expense ratios, fees and taxes when making their initial investment decisions.
Expense ratios and fees are the money that mutual funds, brokerages and other third parties will charge investors to handle their investments. They may be expressed as annual percentages or charged individually based on transactions such as buying or selling shares. Investors should be sure to read and understand the terms of any arrangement before buying in. Ideally, they should also take advantage of no-load mutual funds and other investment companies that keep service charges of all kinds to a minimum.
Depending on what type of financial tools investors select, they may find that their investments are being double taxed. Before selecting retirement accounts, in particular, investors should carefully review the terms of tax-deferred and tax-exempt accounts to ensure they are not paying more taxes than necessary on those funds either now or in the future.