How to Invest When You Don’t Have Much to Invest – Cheap Investments

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Trying to invest less than $1,000 can be frustrating — everywhere you turn, you run into barriers. Many investment companies want you to pony up thousands just to open an account. Then there are fees, which can quickly eat up a big chunk of your cheap investments even at the discount brokerages.

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How to Invest When You Don’t Have Much to Invest - Cheap Investments

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The good news: You have options.

First, let’s be clear: We’re talking about investing here, not saving. Saving is for short-term goals and emergency funds. Savings should be kept in safe, liquid accounts like FDIC-insured bank accounts that offer no risk but no real growth, either.

Investing, by contrast, requires taking some risk of losing money with the hope of future gains. The smartest way to invest is for the long term, meaning 10 years or more, in a well-diversified mix of stocks and bonds. If you can’t keep your hands off the money for at least 10 years, you probably should be saving rather than investing.

Assuming you can, though, here are some of the best options no matter how little the starting amount.

 

1. Your Workplace Retirement Plan

About half of U.S. workers have access to a 401(k) or similar workplace retirement plan. Your contributions can reduce your taxes, and most plans offer some kind of company match, which translates into an instant return of up to 100 percent of what you contribute. A dollar-for-dollar match up to 6 percent of pay is currently the most common match, although many companies match 50 cents for every dollar contributed up to 6 percent. Some match less, or not at all. Workplace plans typically don’t have account minimums and most have reasonable cheap investments costs. The money’s supposed to be left alone until retirement, though, so there typically will be taxes and penalties if you tap it early. Don’t have a workplace plan? You can set up an IRA with a discount brokerage (more on that later).

 

2. A 529 College Savings Plan

You usually can start a 529 college savings plan with a $15 to $25 minimum monthly contribution, and some of these state-run investments have no minimum investment requirement. Withdrawals from the account are tax free if used for qualified education expenses anywhere in the country. You’re offered a variety of investment options, including “age-weighted” plans that get more conservative as the beneficiary nears college age. The downside: It’s a college savings plan, and you might not need or want to save for college education. Withdrawals for other purposes trigger a 10 percent federal tax penalty plus income taxes on any gains.

 

3. Try a Robot

Digital investment advisors — sometimes known as “robo-advisors” — invest your money according to computer algorithms at a fraction of the cost of other cheap investments options. The advisers typically use ultra-low-cost exchange traded funds (ETFs) to keep costs down. Big-name companies such as Vanguard and Schwab now have digital investment services, but Betterment was one of the first to offer this fully automated option — and it’s doing so with no minimum investment requirement, which is rare. However, you’ll need to invest at least $100 a month using Betterment’s automated deposit service to avoid a $3 monthly fee. Betterment charges account management fees of .35 percent for balances under $10,000, .25 percent for balances under $100,000 and .15 percent for larger balances. That’s in addition to the underlying costs of the exchange-traded funds, which range from .09 percent to .17 percent.

That means the maximum you’d pay is slightly over one half of a percentage point. The average mutual fund charges 1 percent each year, and many investors pay an additional 1 percent or so for a human advisor to manage their money, so it’s a pretty good deal. Still, not everyone is comfortable putting a computer in charge of their money. Another option is Acorns, a mobile app that automatically rounds up your daily purchases to the nearest $1 and then deposits this “spare change” into an investment account. The fee is $1 a month for accounts under $5,000 and .25 percent for those over. The conundrum: The $1 fee may be less than Betterment’s for amounts under $100, but the less you invest, the bigger the percentage that’s eaten by the fee.

(Read also: How to Teach Your Teens About Credit Cards)

4. DRIPS

Dividend reinvestment plans, or DRIPs, allow shareholders to buy additional shares directly from the company. You may have to buy the first share through a brokerage or transfer agent, but after that fees are typically low or nonexistent. You can invest small amounts, with many firms requiring a minimum purchase of just $25 to $50. Some of these companies are household names: 3M, Bank of America, Johnson & Johnson. The Motley Fool has a good tutorial in how these plans work. The big drawback to DRIPs is that small investors won’t be adequately diversified. Owning one or two or 10 companies puts you at more risk than owning hundreds or even thousands of companies, like you do with mutual funds and ETFs.

 

5. The Right Discount Brokerage

Monthly account fees have largely disappeared from the discount brokerage world, and these days many offer low, flat trading fees ranging from $5 to $10. That’s great news if you’re investing a lot at once, but not if you’re investing small amounts. Sharebuilder and TD Ameritrade have no minimum investment requirements, for example, but charge $6.95 and $9.99 respectively to buy or sell an investment. If you want your fees to be less than 1 percent, which is a good target, you’d have to invest at least $700 with Sharebuilder and $1,000 with TD Ameritrade.

Other discount brokerages offer low-cost mutual funds and ETFs without trading fees, but they have minimum investment requirements. At Vanguard, widely considered a low-cost leader, you typically need $3,000 to invest or $1,000 if you’re buying a Vanguard Target Retirement Fund. T. Rowe Price has a $2,500 minimum for most accounts and $1,000 for IRAs. Schwab has a $1,000 minimum. If you can invest at least $200 every month, you can open an IRA or Roth IRA at Fidelity. Otherwise, the minimum is $2,500. Don’t have enough? One option is to simply save up until you do. Most online banks have no account minimums or fees. They pay better interest rates than typical brick-and-mortar banks, but it’s usually less than 1 percent. (Bankrate has a good tool to help you find the right bank for you.) That paltry sum, though, may provide just the motivation you need to save enough to meet a discount brokerage’s minimum and start putting your money to work. (Source: Daily Worth)

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