You Don’t Need a lot of Money to Invest in the Stock Market
There is an old saying that it takes money to make money. The assumption is you can’t build wealth investing small amounts of money. You can build wealth when you invest with small amounts of money, you just need a disciplined approach. The key to building wealth is to start young, take advantage of tax sheltered diversified investments, and increase your investment contribution rate over time. When you don’t have a lot of money to invest you need to get a little creative, here’s how.
Employer Sponsored Retirement Plans
As opposed to personal pension schemes like SIPPS, employer sponsored retirement plans like 401ks, IRAs or 403bs for government employees are a great place to start investing, especially if your employer offers a matching contribution. These types of plans allow employees to invest for as little as $25 a paycheck and as a result of recent legislation, many employers are now enrolling new hires automatically. Employer sponsored retirement plans are designed to make it easy for employees to invest in the stock market. All you have to do is decide on your asset allocation and contribution percentage. Some other benefits are:
- Contributions to 401k, 403, 457b, SEPs, and Simple IRAs are pretax dollars which reduces your taxable income.
- Employer matching contributions leverage your initial investment and is free money.
- Your 401k or 403b plan may allow you to contribute after-tax to a Roth IRA. There is no up-front tax benefit however, qualified distributions are tax free.
- Contributions automatically increase as your salary increases.
- You may be able to borrow from your vested balance at reasonable interest rates.
- You may be able to access your retirement account penalty free if you leave your job after age 55. (Does not apply to IRAs)
Dividend Reinvestment Plans
Dividend Reinvestment Plan (DRP) and their cousin the Direct Stock Purchase Plan (DSP) – Dividend Reinvestment Plans allow individual investors to purchase shares of stock directly from a company usually through a transfer agent. Investors can invest in small amounts, as little as $25 on a monthly basis, and have dividends reinvested for little or no fees. There are limits on how much you can invest in these stock purchase plans, typically in the thousands of dollars per quarter, which make these plans perfect for the small investor. In most DRP plans you will pay a “first-time” purchase fee, usually $250 and then pay a small fee for each purchase thereafter.
There are over 1000 companies that have DRPs that allow individuals to purchase shares of stock at a discount to the current market price. Typical discounts range from 1% to 10% which gives you an immediate return on your investment.
Discount Brokerages
Scottrade offers $7.95 trades with a $500 initial deposit while discount brokers TradeKing and Zecco has $4.95 trades with no minimum initial deposit required. In addition, many online brokers will waive the minimum initial investment if you setup automatic monthly transfers from a bank account. Since trading fees can easily wipe out investment gains, one option is to invest in zero commission ETFs such as those offered by Schwab or Vanguard.
Wealth Building Basics
Before you run out and open a brokerage account lets review some personal finance fundamentals:
- You should have a 3-6 month emergency fund.
- Invest the maximum in your employer’s 401k plan or at least enough to take advantage of any company match.
- Pay off any high-interest debt.
Once you have your financial house in order then you will be in a position to take advantage of other investment opportunities such as a Roth IRA, real estate or other investment.
What advice would you have for building wealth with small amounts of money?
Great suggestions paul – I’m hoping to start a DRIP sometime soon.
I think the best advice is to just be consistent. If you can only afford to save $15 a month – stick with it. Make it a goal to bump it up by $5 every other month if you can. What you don’t see, you’ll soon learn not to miss (as much) so automate your contributions with an account like Betterment. (You can read my Betterment review here)
Good tips overall. I agree with every one you make here, especially that you should have an emergency fund to cover 3-6 months of expenses. Don’t go without an emergency fund – you won’t regret having it!
If you have a little extra income, but haven’t opened a retirment account, I’d place opening an account over high interest debt. I’m not saying neglect the debt, you should focus on paying it off, but starting retirement funding early to take advantage of compounding, I think it’s worth the risk to at least put a little down to start the account.
I have MB Trading and its either $4.99 or some percent which ever is higher as commission and they no deposit requirements.
I use DRIP programs and I also use ETFs that are commission free, like the ones that are through Charles Schwab and Fidelity. I have a Fidelity Credit Card and my rewards go directly into IYR once I have built up enough rewards to buy a share, a free ETF that is available to Fidelity customers.
I am currently up 15% on that small amount of money. Hopefully that continues, although I know it is not for sure.
Commission free ETFs are a great way to participate in the market. There is a temptation however for some investors to trade more frequently with ETFs which usually hurts returns.
My advice would be not to let fees for buying stocks eat up too much of what you’re investing. The lowest price I’ve seen for buying stocks is the $4 fee at Sharebuilder, and so if you’re only investing $20 a pop, you’re already facing a 20% loss. I do my best to keep my losses from buying stocks to less than 2%.
I just started saving for retirement in a 403B at work. I had thought about saving earlier, but my employer puts 3% of my salary in once I vested at 2 years. It’s not a lot of money, and it’s not a match (I wish it was), but like you said, you don’t have to make a lot of money to invest.
That is a good start Kari, but you will need to increase your contribution rate. I would suggest increasing your contribution percentage by 3% each of the next several years and look for ways to increase your income or cut spending to “pay” for it.
Excellent advice on the Wealth Building Basics! Those 3 things should be addressed before making any investments!
I laughed when I got to the bottom and read about the simple basic rules. Haha, because that is what people do — we get excited about something new and run out and do it before everything else is in order!
Another option is to invest in peer-to-peer lending with sites like Prosper and Lending Club. $25 gets you in the game and returns average above 9%. Bonus, you can help people get out of their high interest rate credit cards.
Investing in tax liens is a great way to invest small amounts of
money for a very safe and high paying return. I am not much
for the traditional financial wisdom which over the last several
decades has not panned out very well. I have seen figures
that over a 30 year period most people have achieved a 3-5%
return depending on whether they managed their own money
or had someone else do it. Tax liens on the other hand pay
anywhere from a guaranteed 10-25% (depending up which
of the over 5000 property tax entities you purchase from) and
the investment can be as little as a few hundred to several
thousands of dollars. If someone wants to invest in them
in a retirement account, they can open a self directed IRA.
Great post! I feel like you laid out a straight forward path to investing for those of us who don’t make a ton of money. I’ve seen a number of posts that talk about retirement investing around the personal finance blogosphere, but I’ve never seen anything about Profit-Sharing. That’s what my company does and it’s fairly confusing. After studying it for a while, I understand it, but it’s certainly something I’d like to learn more about if it’s a topic you are familiar with.
Here’s another great reason to consider starting with an employer sponsored retirement plan that has a match. If your employer matches you 50% on the first 6% of what you contribute (this seems to be the most common matches I have seen) then you are effectively getting a first year return of 50% on the first 6% you contribute. Not even Bernie Madoff could promise you that kind of return on your money!
Hey Paul,
Thanks for the follow on Twitter.
I’ve just started my blog and am happy how things have been progressing. Agree with you that you need the discipline and stick to your own trading rule. As a recent graduate, I’m definitely investing with little money and I’m still finding the best approach towards it!
Congratulations on making the important commitment to investing, best of luck to you!