[Update: This post is updated as of today, August 16 2013. ]
Although this blog is called Saving Cash Tips, we often talk about investing and the best way to invest money now, since keeping your money is just as key as saving it! But in this post, we want to talk a little about how to invest if you only have small amounts of money to invest.
Here’s a summary of my suggestions:
First consider buying an I Bond. You can read about it below. This is a way to make some interest virtually risk-free. It’s not a lot of money though, don’t expect to get rich. You need a minimum of $25.
Don’t bother with a CD or savings account, at least not right now. Interest rates are below 1% – reidiculous when the inflation rate is hovering around 2%. You’ll lose money. Instead, pay off debt.
Stocks: I can’t recommend stocks or ETFs since with just a small amount ($25-$100) you’ll have trouble recouping the commission fees in a reasonable time. HOWEVER. If you have an account with a broker that has commission free ETFs, such as ScottTrade, then you might look into parking your money in a low-priced ETF because you won’t lose money on the commission fee. Some suggestions are in this post, but look for new posts coming up that explains in more detail, with suggestions of ETFs to take a look at.
How Much Is A “Small Amount”?
First off, what do we mean by small amounts? Well if you’re just getting started with a savings plan, amounts like $100, $100 or $1000 are small amounts. Generally, any amount under $5,000 is a small amount, if you are considering stock investing. You want to minimize risk, and continue to save, without your money being lost to market fluctuations or high fees. It’s also important to realize that as an investor, you really cant count on “buy and hold” for long time periods, as the market we are in now is probably unique in history, in that it is quite unstable. There are not going to be 20 year upswings like we thought we’d have in he past. So, that means if you are in the market, you have to be prepared to buy and sell when the conditions require it.
Why Buying Stocks Isn’t A Good Idea – Usually.
As a result, for amounts in this range, sometimes buying stocks is not a good idea, and here’s why: You will pay a larger portion of your base investment in trading commissions or fees. If you are buying stocks, you’ll pay both to buy and when you sell stock. Since you can’t just buy and never sell, you will pay on both ends. In addition, the appreciation in stock is likely not going to be huge on just a couple dozen shares. Until you have a larger amount to invest, its probably better to select investments where you can make some money, but forgo the casino that is the stock market until you can afford to lose to the house.
Where To Invest With Small Amounts.
A couple good examples of place to invest with small amounts of money are savings accounts, CDs, savings bonds, and ETFs. For example, you and open a high interest savings account online usually with $100 minimum investment, and you can earn a couple points in interest, while having your savings insured (which is not true in the stock market). A certificate of deposit, or CD, will give you an extra half percent or so, but may come with restrictions if you have to take the money out before the CD matures. I don’t like these accounts though because while safe, the interest rates are just ridiculously low – under 1% as of this writing. No reason to put money here. Go with Savings Bonds or commission free ETFs instead.
Another option is to buy savings bonds. The U.S. Treasury now sells these online at Treasury Direct, and you can invest with a transfer from your bank account in amounts as small as $25. As of this writing, a November 2009 I-Bond, which is indexed for inflation, is earning 3.77%, which is nothing to sneeze at considering the market is all over the place. As with any bonds, you have restrictions on when you can withdraw your funds, but you can also have money automatically deposited into this account, and use it to buy savings bonds as well as Treasury bonds.
Commission Free ETFs
I’m going to add an entire post on these, but for now, consider that some brokers offer certain ETF families to their customers, for a zero commission. This means that all of your money is working for you. when you’re investing with just a little cash, say, $50, paying a $9.99 commission means your investment must return 20% before you even break even! Even in this bull market, it’s going to be a few months before you begin to actually take gains. And then, don’t forget, you’ll pay again when you sell, so buying anything with a commission when you only have a small amount of cash is not a good idea.
How About Mutual Funds?
Many funds require a minimum investment, which is usually upwards of $1,000. There are funds with lower investment entry points, but if you only have $50 or so, it’s not likely you’ll find one. (And when you do, check that they are no-load and low fee – often, low minimum investment funds will get their money with high loads and other fees.) If you already have a fund open, then consider adding to it, usually this only requires investing in increments of $25-$100.
If you are looking for the best way to invest with little money, you want to start small, and keep making deposits, and build up your investment account before taking larger risks. Today you have plenty of choices for smaller investments, where you can have a safe, insured account until you are ready to take the next step.