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Sometimes when we imagine investing, we think of financial gurus standing on the trading floor watching the ebb and flow of the market. But in reality, you don’t need to have copious amounts of cash or an extensive knowledge of the market to get your feet wet in the world of investing. In fact, you can receive some great payoffs by investing small amounts. Whether you have $10, $100, or even $1,000 to invest, you can start making your money work for you.
Why Invest Small Amounts of Money?
The most important reason to begin investing small amounts of cash is to make money on your money. You might be wondering how that works, and the answer is compound interest. Compound interest is calculated based on the deposits in the account, which includes contributions plus interest accrued over the period of time since the account has been opened. Different from simple interest, where the interest is only based on the principal amount, compound interest can be considered "interest on interest," as you are continuously making money on the entire amount within the account.
To give you an example of how compounding interest would work on small amounts of cash, let's say you start your investment account with $50. From there, you begin to put aside an additional $100 per month into the account, and the return rate on the account is 10%, which is compounded annually. After the first year of the account being opened, you would have contributed $1,200 and received $61.79 in interest, adding up to a total of $1,311.79 in your account (contributions + interest + starting balance). While that amount of interest may not seem worth your while up front, the big payoff comes a bit more down the line. If you were to continue that pattern for 10 years, you would have contributed $12,000 and made $8,066.07 in interest, totaling $20,116.07 in your account.
The key to these investments is patience and consistency. Sure, the payoff may not come right away, but the longer you keep your funds in your account, and the more you contribute, the larger the payoff will be*. Imagine thousands of extra dollars that you would not have had otherwise! Long-term investment plans are perfect for saving funds for something such as retirement or tuition.
(And if you don't feel totally comfortable investing, increasing your financial literacy may be a key first step.)
How to Invest Small Amounts of Money
When it comes to how to start investing, the following options to choose from can help you hopefully* receive a great return on your funds.
Employer's Retirement Plan
These days, many employers offer some retirement program that allows employees to put a portion of their paycheck into a retirement account. The most common account offered is a 401(k), which typically will offer a Traditional (pre-tax income) and a Roth (after-tax income) option.
The Traditional approach contributes more now, and you will get taxed once you begin to withdraw from the account, while the Roth option will allow you to pay taxes on your contributions now rather than later. You should take a look at your entire financial picture before deciding which method is best for you. But a 401(k) is an easy way to build up important savings for retirement with minimal effort on your part. Additionally, you will get to choose the percentage or fixed amount you'd like to contribute from each paycheck.
If you'd like an option that will do most of the work for you, a Robo-advisor is a great way to go. You contribute your funds on a frequency of your choosing, and this advisor will manage the account for you. It's important to mention that it will typically take up to 0.50% of the account balance per year as a fee, but it could be worth it as they do not require a lot of cash and will take care of the leg-work for you.
There are many investment apps on the market today, such asAcorns, Robinhood, and Stash. Each of these provides different services that can invest for you, educate you on investing, and walk you through the process. Typically, you can have as much or as little work to do on these as you'd like. They often come with a small monthly fee but require little amounts to get started.
Some apps do offer fractional stock trading as well. This means you can buy and sell portions of a single stock as opposed to buying a single or whole share. Fractional stock trading may be a good way to dip your toes into the process.
High-Yield Savings Account
If you're looking for something ultra low-risk, consider starting with just a high-yield savings account. This savings account can have an annual percentage yield (APY) of up to 1%. Keep in mind that with low-risk typically comes low-reward ¬– so you won't see as great of a payoff as other investment options. However, it's a good starting point if you'd like to get used to setting specific amounts aside and figuring out what is best for your financial picture before diving into other investment options.
The Bottom Line
Starting your investment journey doesn't have to be as intimidating as it may seem, and you don't need a lot of money to get started. Be sure to consider all of the options available to help decide which is best for your finances.
And if you're not totally ready to start investing, challenging yourself with building your savings can also be a great step forward.
See what saving with Monorail could look like for you.
*This article does not count as financial advice. Investing comes with risk. Please ask an expert or financial advisor for investing advice pertinent to your individual situation.
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