Article from The Motley Fool
Got only $20
to put away right now?
It may not
sound like much, but you can use it to buy shares in Intel. Or Johnson &
Johnson. Or Harley-Davidson (you rebel). And those are just a few of more than
1,000 options available. What if you've got $100 -- or $1,000? Your options are
even greater.
We're not here to tell you where to
invest your money. We won't lay out a handful of stocks on a "buy"
list. But what we can tell you is how you can invest your money
-- the mechanics of investing small, large, and medium amounts of cash. We can
even help youchoose a broker.
How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high-interest debtand that you have some money stashed in a safe place (like a savings ormoney market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough, and you want to begin investing for your future.
Is it even
worth it to invest such a pittance?
Heck yeah it
is! One of the best ways to invest small amounts of money cheaply is through
Dividend Reinvestment Plans (DRPs), also known as Drips. They and their
cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and
their commissions) by buying stock directly from the companies or their agents.
More than 1,000 major corporations offer these types of stock
plans, many of them free, or with fees low enough to make it worthwhile to
invest as little as $20 or $30 at a time. Drips are ideal for those who are
starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging).
Once you're in the plan, you can set up an automatic payment plan, and you
don't even have to buy a full share each time you make a contribution.
Drips may be one of the surest, steadiest ways to build
wealth over your lifetime (just make sure you keep good records for tax
purposes). For more details on Drips, see "What if I can only invest small
amounts of money every month?"
How to invest a couple of hundred bucks
So you've weeded out all the wooden nickels from your spare-change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your ticket to an investment that has traditionally returned about 10% per year.
Some index
funds require as little as $250 for you to call yourself an owner. This low
minimum is usually restricted to IRAs (Individual Retirement Accounts). After
your initial investment, you can add as much money as you like, as frequently
as you like, with no additional costs or commissions. You purchase index funds
directly from mutual fund companies, so there are no commissions to pay to a
middleman.
If you have a
few hundred dollars to start with, then this is a great, low-cost way to
establish an instant, widely diversified (500 companies!) portfolio.
How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and now you'll have your pick of fund companies that require higher initial investments. This freedom will enable you to shop around for a fund with the lowest expense ratio.
You should also seriously consider opening a discount brokerage account.
You'll want to focus on the account option that best serves your needs; some
accounts require a minimum initial deposit, and some don't. That means you can
open up an account with whatever investing money you have available, and start
researching and perhaps purchasing individual companies. (Or, if you're
enamored of index investing, you can easily invest in Spiders, a
stock-like investment that mimics the performance of the S&P 500.)
The key here
is to keep your costs of investing (including brokerage fees) to less than 2%
of the transaction value. So if you're planning to add to your position in
stocks a few times a month, a Drip or an index fund may still be the way to go.
How to invest $1,000-plus
What can you do with a grand? Obviously, with $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment.
Say you've got 40 years to retirement. If you start with
$1,000 and invest an additional $1,000 each year, and your money earns 10%
annually, then when you're ready to retire at age 65, you'll have $532,111.07.
That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you
won't even pay any taxes on that $532K when you withdraw it. (As always, your
mileage may vary.)
Again, even at
this level, the key is to keep fees from eating up your earnings. So make sure
that the costs of investing (including brokerage commissions, stamps to mail in
checks, and books that help you learn to invest) are less than 2% of your
account's overall worth. With small accounts, that can be a challenge, but with
such low commissions being offered by discount brokers, it's definitely doable.
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Article
from The
Motley Fool