You don’t need that much money to start investing and to begin growing wealth.
Take Warren Buffet as an example. He’s the third-richest man in the U.S. But he didn’t start out wealthy. In fact, he was born during the Great Depression, bought his first stock when he was 11 years old, and continued to invest earnings from his paper route. From these small beginnings, Buffet became a millionaire by age 30 and now, as the head of Berkshire Hathaway, he has a net worth of $89 billion.
Buffet’s story is a powerful lesson about starting small—and early—when it comes to investing. You don’t need a large sum to get started. In fact, you can often open a brokerage account with just a few dollars, adding to your savings as you go. Exactly how much money you need to start investing depends on your investment goals and the types of investments that interest you.
What to consider before investing
Investing can be an important tool to help you build wealth, potentially earning you more money than you would earn in a bank account. The average interest rate for a savings account is 0.09%, according to the Federal Deposit Insurance Corporation (FDIC), while investors might see an average return of 5.6% on their investments. Returns will vary for each investor.
But stock markets can be volatile, and you can potentially lose money. That’s why you should consider making investing a part of a long-term financial plan, which can give you a chance to ride out volatility and give you a greater opportunity to experience growth.
Before you start investing, consider your goals and time horizon. Do you have long-term objectives like paying for your child’s education in the next 18 years to 20 years, or funding your retirement savings over the next three or four decades? If you are looking to save for a shorter-term goal, like buying a new car, it might make sense to save in a high-yield savings account that gives you quick access to your cash without the risk that you’ll lose a large amount of money.
Before you start investing, you may also consider establishing an emergency fund, equal to three to six months worth of your monthly expenses that you keep liquid in a savings account. Emergency funds help cover you in the case of unexpected expenses or events, such as losing your job, helping prevent you from going into debt.
To find the money to invest, it helps to have a budget. To begin, calculate your monthly income. Then add up all of your necessary expenses, such as rent, utilities, car payments, insurance and food. Subtract this figure from your total income and what you have left is money for discretionary spending. This is where you can find the cash to add to your savings and investment accounts.
Finally, if your employer offers a retirement plan, such as a 401(k), with matching funds the question of how much to save may be an easy one. Try to save up to the match, since your employer contributions are essentially free money.
Keep in mind that investing comes with risk. You could lose your initial investment if a company goes bankrupt or a bond issuer defaults, for example. You can mitigate risk by diversifying your portfolio with a mix of many different kinds of stocks and bonds.
Why start investing small
When you make your first forays into investing, you may be constrained by your budget, and you may only have a few dollars to spare. Even so, investing can be worth it due to the power of compounding—the returns you earn on your returns, that can help your money grow over time.
How much money do you need to start investing?
The cost to start investing will vary by investment type. Here’s a look:
When you buy a stock, you’re buying shares of ownership in a company. The price per share can range from a few cents for penny stocks to thousands of dollars. You can buy individual shares, and some institutions allow you to buy fractional shares, pieces of a whole share of stock you might otherwise be unable to afford otherwise. For example, if you can’t afford the more than $2,000 it costs to buy a share of Amazon, you might be able to buy a fraction of a share for $25 or less.
You typically invest in stocks through a brokerage account. Many online brokers have no minimum investment, and charge low or no fees to trade.
When you buy a bond, you are loaning a company or government money. Bonds function much like an I.O.U. The issuer agrees to repay your principal at a later date, and meanwhile they pay you interest. Like stocks, bonds come in a range of prices. U.S. Treasuries, considered some of the safest bonds, are sold in $100 increments. The price of corporate bonds varies, but you can often buy them for about $100 as well. You can also gain access to the bond market through bond funds, which can give you access to many different bonds through one investment vehicle, which you can buy for as low as a few dollars per share.
If you’re not interested in making single investments in stocks and bonds, you may consider mutual funds, which pool investor money and buy a diverse basket of many investments. Shares of mutual funds can range in price from tens to hundreds of dollars. Be aware that while some mutual funds require no minimum to begin investing, some can require investment minimums of $3,000 or more.
Exchange-traded funds (ETFs)
ETFs are also collections of securities. They act a bit more like stocks than mutual funds do. Unlike mutual funds, which trade only once per day, ETFs trade throughout the day the way stocks do. The cost to buy an ETF depends on its share price, which varies and can range from less than $25 to nearly $400 a share.
Ready to start investing?
If you’ve got a few dollars in hand and you’re ready to start investing, you can open a brokerage account to start buying and selling securities. Consider automating your investing with apps, that allow you to regularly move money into your investment account, or round up when you make purchases, investing your spare change.
Auto-Stash is an easy-to-use tool on Stash, and we consider it to be one of the most important financial tools. Auto-Stash features can help you save or invest small amounts of money consistently over time, regardless of market conditions. You won’t have to worry about trying to pick the right time to invest or “timing the market” which we don’t recommend.