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If you hear the word “investor” and automatically think of large sums of money, you’re not alone. Typically, the idea of investing conjures up someone who has plenty of cash to put into stocks, mutual funds, and other ventures. In fact, a lot of people either put off investing or never bother with it at all, thinking they don’t have the funds to start.
In reality, anyone can be an investor. You don’t need thousands of dollars to do it. There are plenty of ways to invest small amounts of money – and here are just a few of them.
Best Ways to Invest Small Amounts of Money
A high-yield savings account can serve as a sort of piggy bank that can offer modest returns. Many banks have programs allowing you to round up debit card purchases to the next dollar or $5, and funnel the extra money into a savings account. For example, if you make a purchase for $19.45, the bank will round it up to $20, and put the 55 cents change in your savings account.
You can also simply open a money market or other high-yield account and start budgeting funds to invest regularly. In many cases, high-yield accounts can start with as little as $500 or less. Check with your bank to find out your options for the highest savings account yields.
The stock market offers many ways to invest small amounts. The price of a share of a company varies dramatically from company to company.
There is no minimum to the number of shares you must buy, so you can easily invest in a company for a small amount. Buying stocks often comes with a broker’s fee that adds to the cost, but the market has a burgeoning number of options in free trading platforms. An app called Robinhood is among the best investment apps worth considering. Essentially, you can buy a share of a company for its trading price at no additional expense.
Investors intimidated by choosing specific stocks also have an option to invest in basic themes and trends such as online gaming or healthcare through a platform called Motif. There’s no minimum deposit, so you can start with a small amount, although the service is $19.99 monthly.
ETFs and Mutual Funds
Exchange-traded funds, or ETFs, are traded much like stocks on exchanges. These funds bundle multiple stocks or bonds, then sell individual shares to investors, often for modest amounts. Essentially, investors are pooling their money to diversify their portfolios for smaller buy-in amounts.
Mutual funds work in much the same way with the pooling effect, but they usually must be purchased through a broker, which can come with more fees. For both ETFs and mutual funds, the barrier to entry is quite low – as low as about $10 per share.
Retirement funds cover a wide variety of investment types, including the more common 401(k) and IRAs, or individual retirement accounts. In both cases, you can invest even a small percentage of your income automatically. With IRAs, you can make additional contributions as well. A 401(k) plan is offered by an employer. Many businesses match funds contributed by their employees up to a certain percentage, which compounds your money much faster.
You can open a IRAs through many banks, investment firms, and even insurance agents and choose various funds or stocks based on your risk tolerance. If you don’t withdraw any of the money until retirement age, you can often avoid paying taxes on it at all. If you take it out early, however, you’ll not only pay taxes, but you’ll pay a penalty for early withdrawal as well.
Real estate investment trusts, known as REITs, are companies that manage real estate portfolios for profit. REITs typically run shopping malls, apartment buildings, warehouses, hotels and resorts, or even office buildings. As the tenants make profits, they pay monthly rent or a mortgage payment to the REIT, which is then passed on to the investors.
You can invest in these companies, and as the real estate produces income, then you get paid. Store Capital Corporation, Liberty Property Trust, and American Assets Trust are examples of REITs. Each has its own rates, minimums, and expected returns. You can invest in many REIT stocks for fairly low amounts. For example, shares of Store Capital (STOR) are less than $30.
Dividend Reinvestment Plans (DRIPS)
With a Dividend Reinvestment Plan, or DRIP, you can reinvest your cash dividends from your stocks into additional shares of that same stock. As an added incentive, most companies allow you to make that secondary reinvestment without paying commission. These dividends can even buy a fraction of a share.
To participate in a DRIP, you must already own equity in that company, which can require a bit more money. If you already own stocks, however, DRIPs can be another great way to invest small amounts.
Peer-to-Peer lending can be very lucrative. It involves making loans through a facilitator company directly to borrowers. In many cases they are small, short-term loans, such as $500 or less for a one- to three-month period.
The lower the borrower’s credit score, the higher the risk, but the higher the payoff when the borrower pays back the loan with interest. A $500 loan over three months can bring an annual return rate as high as 50 percent, which is a lot of money and a quick turnaround.
However, there is a possibility that you’ll lose your money if the borrower doesn’t pay the loan back. LendingClub is one facilitator company that allows you to sign up and browse loan applications. You can simply choose a loan to finance.
Spare Change Investing
Just like some debit cards allow you to move your spare change from a purchase into your savings account, a growing number of apps allow you to round-up purchases and invest the change into stocks. Acorns is one such app. After you sign up, you link your bank account to allow it to round-up purchases and apply the extra change to your investment account. Dividends from those investments can be reinvested as well.
The drawback to apps like Acorns is that it must have access to your bank account, which can be a concern for those who are privacy-minded.
You don’t have to have thousands of dollars to start investing. All of the methods above allow you to start investing small amounts of money. Regardless of how much you invest, you should ideally start as soon as possible so you don’t miss out on the benefit of compounded returns.
Author: Jeff Gitlen