Don’t Believe The Budget Deal Hype

Just yesterday there was a “bipartisan” budget deal that passed the House of Representin’. Immediately, the talking heads on CNBC are saying how great this is for consumer sentiment, how this vote is making people want to buy buy buy, and so people should get out there a buy buy buy!

Well, not so fast. This budget deal really doesn’t do ANYTHING for the fact that real incomes for the lower 80% of American earners hasn’t changed in 20 years, and it’s not going to change. We’re in debt, we’re not making more money, and the budget deal should change nothing if you’re trying to get back on good financial footing.

The bottom line for most Americans is that the best place to be financially is with little or no debt, with savings you have easy and quick access to. and investments you are in control of. If you’re not sure what “in control of” means, it means you should be in charge of the stocks, ETFs and mutual funds you own. Choosing the investments, knowing when to buy and sell, and investing amounts that make sense for you, not just “max out your contribution” or some other kind of standard one size fits all “advice”.

When you hear the commentary, take note, but stay the course. Keep making extra money, paying off the debt, and investing for YOUR OWN wealth, not to make banks, hedge funds and credit card companies rich.

Best Ways To Invest With Little Money

[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.

Savings Bonds

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.

Can You Make Money In This Market?

This market is truly full of ups and downs. If you need to make
money it’s not worth it to put all your eggs in this basket. If you think you
can do better by investing in stocks you might want to think again. Today the
returns on investments like certificates of deposit might even be higher if you
factor in all the costs of investing plus possible losses. The question is can you afford to have money in the market if the market goes down significantly? It’s very likely that we could
see another market crash similar to the one we saw a few years ago.

In terms of regulation and bank stability nothing has really
changed. Banks have just as much incentive to take risks with their assets as
they ever have. If you think your money is safe in the market, you should know
that the banks are using the market as their private casino. The individual
investor really doesn’t stand a chance against their fire power.

So what is a small investor to do? Where do you invest today, especially if you only want to invest with small amounts of cash?  First, learn as much as you can about your investment options today. Try investing a larger portion of your portfolio on safer investments, or hold cash to take advantage of a future drop in prices.  Today you might consider
putting your money in something that will earn interest. One of the safest
investments remains treasury bills. Today you can earn upwards of 3.5% or 4%  on a
30 year T-bill. Even know that sounds like a small amount the fact is you would
have a hard time duplicating that in today’s stock market.

You don’t have to invest directly in Treasury bills either in order to benefit. You can purchase ETFs that allow you to invest in treasuries without holding the actual mail. It’s
easy option which allows you to buy and sell your shares on the market just like a stock. Here are some ideas for investing in ETFs.

Just remember that your earnings are taxable as federal income
just like any other investment. This may reduce the overall value of your
investment, but the fact is your going to have the same issue with any other
stock investments.

Can A Small Investor Still Profit In The Market?

The average investor is at a distinct disadvantage in today’s markets.  Large institutional investors, hedge funds, and other large investment houses all have tools available to them which are not available to the average investor.  These tools allow them to see what is going on in worldwide markets as well as trade out of the spotlight of the public market.  An individual investor can make money mainly by understanding this system, using their wits and learning about available investment options thatmay be new to them.

One example of investment vehicles that is new to many individual investors is exchange traded funds.  Exchange traded funds, or ETFs, are buckets of investments pooled together and then sold as though they are individual stock.  Technically, they are funds made up of combinations of investments, or they track individual investment vehicles, such as commodity futures.  It’s a way for an individual investor to get into certain investment vehicles that might not be available to them otherwise.  As an example, many 401K accounts do not offer ETFs as an investment option.  Usually, a 401K retirement account is run by a fund company and therefore mutual funds are the extent of the investments available for your retirement funding.  Today investing in mutual funds may not always be a good idea.  They can have high fees, inflexible investment requirements and other issues that can cause you to lose money when what you’re trying to do is build your retirement account.  With exchange traded funds on the other hand, you have options available to you to invest in individual shares of vehicles that allow you to diversify your funds.  You can get in and out of an ETF immediately, not at the end of the trading day as with the mutual funds.  In addition the fees are generally much lower for ETFs than for mutual funds.

So how can an individual investor get involved in investing with ETFs?  The easiest way is by opening a self directed IRA account, or a self directed 401K rollover.  These accounts allow you to choose your own investments, and not rely on a pool of investments that are pre-chosen for you by your fund manager.  In addition you can pick and choose investments based on your feeling about the market, and allows you to be more self reliant in your investment choices and decisions.  As we saw in the last economic down turn, the fact that an individual is a professional advisor by no means guaranteed anyone profits in their portfolios.  To the contrary, professional advisors did as poorly in the economic downturn as anyone else.  It was only by learning about the markets and investing on your own behalf that your discount brokerage account will be managed with your best interest at hear and not commissions and fees for your broker.

Use A Discount Stock Broker

If you’re goal is to start saving and building wealth for yourself and your family, one of the smartest things you can do is to open a low cost self-directed brokerage account. Discount brokers have been around for some time, however not all discount brokers are alike. Today there are many discount brokerage firms which have a plethora of investment advice and information, blogs, forums, and even web cast videos to teach you how to trade and to teach you about new investment vehicles to help you improve your portfolio performance.

In today’s volatile economy, you no longer can choose a couple mutual funds and leave your money there for 20 years. Smart investors know they must continue to learn about the stock market and about alternative investment vehicles. In order to be well diversified, you must have many options available to you at your disposal. The reason for this is that smart investors know how to make money in down markets. For you to learn about the stock market, you must have resources available to you.

A discount broker offers this type of investment information that can help you diversify your portfolio and profit regardless of market conditions. This is not the same as taking extreme risks. In fact, it’s just the opposite. If you spend the time to learn about the stock market, and paper trade for a period of time with some new ideas, you can easily see how you are learning to choose new investment vehicles that could be useful. A successful investor will have many options available to them and not rely on just one or two types of vehicles such as stocks and mutual funds to make money in their account.

While it’s not impossible to make money in a volatile market, it definitely takes some skill and learning. If you have a self directed brokerage account, or a self directed retirement account, you have the option of investing in many different investment vehicles to help build your portfolio. As an alternative if you have your money with a mutual fund company, you would be severely limited in types of investment you could choose, mainly only mutual funds. The problem with mutual funds is that the fees can be high, and fund management may be restricted to the investments they can choose. It also is not easy to get in and out of the mutual fund quickly depending on market conditions. For these reasons having a self directed account can help you buy stocks, ETFs, commodities, options, and futures, and even mutual funds if you choose.

The bottom line is that you want to both give yourself plenty of options for educating yourself about new investment choices, as well as having an account in which you can purchase those investments and take advantage of what you’re learning to build your portfolio and grow it into the future.