Investing might seem like something that’s reserved for people with a great deal of wealth. However, as is the case with many industries, technology has proven to be a democratizing force in the financial world.
Three big changes that have opened investing up to more people include the digitization of brokerages (online vs. brick-and-mortar), reduced minimums and/or commission structures, and fractional investing, which allows people to buy a slice of a stock instead of a full share. This last piece has become increasingly important as some of the most popular stocks can trade at $500 or even $1,000 or more per share.
Myths about investing
You do not need to be rich to invest. Online brokerages like Public make it particularly accessible, with no account minimums and $0 commissions on your trades. Public is also one of just a handful of companies to offer fractional investing, so you can own the companies you love for whatever you can afford.
Given all this, novice investors need not limit themselves to penny stocks, which are stocks that trade at very low prices per share but often prove to be riskier than more established stocks. Penny stocks are often companies that are either just starting out or are embattled and therefore might not be around for long.
Steps to take before investing
Before you invest, you need to know how to budget. Budgeting just means establishing a framework for your personal money management that factors in the realities of your financial situation and your unique financial objectives. Given the personal nature of budgeting, there is no one tried-and-true approach for every individual. However, there are some general best practices to consider as you craft your own strategy.
Zero budgeting, fo example, is a system in which you account for every dollar coming in and going out. This requires a great deal of tracking and accountability, but fortunately, a number of tools and apps, like Mint, exist to help automate the process.
Another method is the 20/30/50 Rule. This framework establishes a basic principle for spending that you can use to prioritize your spend. The 20/30/50 Rule entails spending 50% on needs, 30% on wants, and 20% on savings.
Once you’ve set up a system for budgeting that works for you, a second step to take prior to investing is to address any high-interest credit card debt you might have. The reason for this is because the high-interest rates of some debt can offset any financial gains made investing.
Lastly, if both your budget and debts are in order, a final step before investing is to sock three to five months of living expenses away in case of an emergency. If your company is offering a 401(k) match, you might also consider putting as much money as you can there to take advantage of the free money that is contributed.
How much money do you need to invest?
This depends on your financial situation and what your goals are. Technically, you can start investing with very little money thanks to services that do not require minimums, do not charge commission fees, and provide a means for buying stocks in a fractional capacity.
What are the options for novice investors?
Here are a few places to consider.
As we mentioned before, if your employer offers a 401(k) program, then this is something you might want to pursue as a first step in your investing journey. These programs work by investing your money before taxes are applied. Some employers offer a match perk, whereby they agree to put in money to match your savings up to a certain amount.
Another benefit of employer-sponsored 401(k)s is that they offer built-in accountability. You need not remember to invest because the money is automatically removed from your paychecks. If it’s not in your bank account, you can’t spend it elsewhere.
Online brokerages like Public do not require account minimums, do not charge commission fees, and allow for investing in slices of shares for thousands of stocks and ETFs. If you’re just starting out, you might set a comfortable target to invest each month and optimize as needed. Tools like Mint make it easy to see where your money is going, so you can assess your spending and determine if your purchases are truly worth the short-term benefit versus the longer-term impact they could have if put to work in the market over many years.
U.S. Treasury securities
If you can afford about $100/month, then you can buy U.S. Treasury securities, which can mature at a rate that falls between 30 days and 30 years. Additionally, you can use Treasury Direct to buy Treasury Inflation Securities (TIPS). TIPS pay interest and adjust for inflation.
What are the benefits of investing with a little money?
The best time to invest is in the past. That’s because of compound interest, or the interest you earn on top of interest accrued over time. Even if you’re just starting out, and starting small, the power of compound interest can magnify over time.
What are the downsides to investing with little money?
The potential downside to investing with little money is that if your risk tolerance is low, then you will be challenged to weather ebbs and flows of the market in the near-term. This is why the steps of understanding your economic realities, setting a budget, and tackling high-interest debt are important before you begin investing.
At the end of the day, there’s no one answer for when you should invest because there’s only one you. The good news is that for people in a position to invest, even in a limited capacity for now, there have never been more accessible tools and services to use for getting started.