Don't let your small budget keep you from taking advantage of the wealth-building power of investing. Here's how to invest with a small budget.
One of the biggest myths out there is this: You need a certain amount of money to invest. In the bad old days, that might have been true. Today, you can start investing with a few bucks — or even pocket change.
Investing is a good way to put your money to work; the earlier you start, the better off you'll be. Thanks to the power of compounding returns, even a few bucks can make a difference in the long run.
Easy Ways to Invest with a Small Budget
Before you become overwhelmed with investing, start with the low-hanging fruit.
- Employer-sponsored retirement account: Boost your ability to invest with a small budget with the help of your retirement plan. Many employers will automatically take money from your paycheck and divert it to a tax-advantaged account. You usually have a few funds to choose from. It's an easy way to get started. And, if you're lucky, your employer will offer a match.
- Roundup apps: Roundup apps can also help you take advantage of your pocket change. I've used Acorns for a while now. It takes your purchases and rounds them up to the nearest dollar, dropping the difference in an investment account.
- Automatic investing: Many online brokers allow you to set up an automatic plan. For example, my son just signed up for Betterment and set up an automatic plan of $10 per week. Other brokers that allow you to invest automatically include M1 Finance and Stash (which also has a roundup option). You don't need a lot of money to set up automatic investments. You just need to be consistent.
- Fractional shares: You can buy portions of shares rather than needing to save up enough to buy a full share. For example, Fidelity introduced “Stocks by the Slice,” which is a way to allow you to purchase portions of shares. That way, you can begin buying into a stock or ETF without too much trouble.
What to Invest In When You Have a Small Budget
Deciding where to put your money can be tough. When you have a small budget, though, your best bet is often to start with funds. You can also benefit from dividend investments.
Index funds and ETFs are low-cost and offer instant diversification
Index funds and ETFs represent a collection of assets. For example, an S&P 500 index fund allows you exposure to every company listed on the S&P 500. You can find ETFs that focus on the Dow Jones Industrial Average and take advantage of that index.
Stock picking, especially when you have a small amount of money, might not be effective. Rather than benefiting from the collective gains of a broad swath of the market, you're putting your eggs in one basket. When starting out learning how to invest with a small budget, funds provide you with a little more stability.
You can branch out as you increase your investment contributions and learn more about investing. But as a beginner on a small budget, index funds and ETFs are the easiest way to make good use of what you have.
What about dividend investments?
Another solid approach can be assets that pay dividends. These assets provide a payout regularly, allowing you to begin receiving income from your investments. At first, however, your dividend payouts are likely to be low. After all, you're investing relatively small sums.
The strategy here: reinvest your dividends. Many brokers will help you automatically reinvest your dividends. So, once you receive dividends, they are used to buy partial shares. That way, you have more shares next time the payout is made. As you automatically invest in a dividend asset and then reinvest the dividends, your portfolio grows faster because your dividend payout increases each time.
While there are individual dividend stocks you can invest in, you might be better off starting with a dividend ETF. This offers you exposure to a collection of assets rather than the need to pick one or two dividend stocks.
Another way I like to take advantage of dividends is through real estate investment trusts (REITs). A REIT allows you to invest in a collection of properties. They often have themes such as residential rental properties or commercial real estate. REITs pay dividends that can be reinvested and continue to help your portfolio grow.
Practical Tips for Investing on a Small Budget
Once you're ready to take the plunge, there are a few things you can do to make the most of each dollar you invest.
- Make it a priority: Prioritize investing in your budget. Put that into your financial plan even if it's $5 a week. You're more likely to follow through when you're intentional about where your money goes.
- Automate your investment: Don't leave it up to chance. Create a situation where you automatically invest regularly. Whether it's your retirement plan from each paycheck or you automatically transfer from your checking account to your brokerage account, make it automatic. Choose a day of the week or month to move that money.
- Start small: Don't overwhelm yourself at first. Start with a small amount that's easy to part with. My son chose $10 weekly because that seemed a good way to begin. He's got a part-time job and is in school, so he didn't want to overextend himself. However, now that he sees how easy it is and how it's not having a big impact on his spending, he's thinking of increasing his investment by another $5 weekly.
- Set up automatic reinvestment: Many index funds and ETFs also pay dividends. Make sure you set up your automatic plan to reinvest your dividends automatically. That way, you build your portfolio a little bit faster.
- Check regularly to see where you stand: My son's biggest excitement is checking to see how his account balance has grown. When you're consistent, you see results. While it can be disappointing to see your account balance when the market is down, you'll see your portfolio trend higher over time.
- View downturns as a chance to get shares on sale: The earlier you start, the more time you have to grow your portfolio in the market. A downturn is a chance to buy more for less. Your weekly investment goes further when prices are lower. Later, as the market recovers, you'll see improved results because you'll have a higher number of shares.
Don't assume you can't start building an investment portfolio just because you have a small budget. When you learn how to invest with a small budget, you get a jump start on creating a more secure financial future.
Image source: Agamitsudo via Wikimedia Commons