If you’re like me, you’ve probably heard that you should be investing. Wealthy people do it, after all, and retirees were able to retire because of it.But what if you only have a little money to invest?
Believe it or not, you could go through your sofa right now and begin investing with what you find, assuming it was money. Candy wrappers and popcorn bits probably won’t do it but a handful of change can have you on your way to investing and building your portfolio with just a little bit of help!
Everyone Should be Investing
No matter which way you look at it, investing is a good idea and really, everyone should be doing it. I remember hearing the term “cash is trash” for the first time and wondering what it meant. Everyone wants cash so how could it be bad?
When it was explained to me, it made a lot of sense. Cash is stagnant. If you have $100 hidden away somewhere, or “worse,” $1,000,000, the value of your money is effectively decreasing over time. This is called the time value of money and this is why a millionaire from the early 1900s is different from a millionaire today. That million dollars was literally worth more back then than it is now.
Now let’s take this example and expand on it and let’s say that they were a millionaire in the year 1900. If that millionaire kept their million dollars in a safe at their home and never invested it, and it just sat there until today, what would the buying power of that million dollars be?
The answer is not a lot, at least when compared to what it was back in 1900. Let me explain.
In order to calculate this we need to use the consumer price index (CPI). If you have nothing to do on a weekend and are really bored, this can be a fun calculation to run on different time periods.
What is the consumer price index? It is a measurement of buying power based on what consumers pay for items in a market basket (ie. a set of representative goods and services purchased by consumers). This can be tailored endlessly to fit your needs, be it to a specific region or to a specific industry but for our purposes we will be using CPI calculated by the Bureau of Labor and Statistics and for our 1900 figure, I will be using a conversion factor chart created by Robert Sahr of Oregon State University which can be found here.
The formula for CPI is the price of our basket of goods today divided by the cost of the same basket of goods for the base period period (the Bureau of Labor Statistics uses the CPI of 1984 as its base period and is indexed to 100), all multiplied by 100.
CPI = (cost of market basket today / cost of market basket of base period) * 100
Now that we have the CPI of today, 289.109 as of April 2022, we can use the CPI from the conversion chart for 1900, which is 0.084 and calculate what the purchasing power of the million dollars would have back then, compared to today. We just need to divide today’s CPI by the CPI from 1900 and multiply our million dollars.
Today’s CPI (289.109) / 1900’s CPI (0.084) * 1,000,000 = 3,441,773,809.52
What does this mean? If you took a million dollars right now and time traveled to the year 1900, you would have the purchasing power of over 3.4 billion dollars in 2022. It means a million dollars back then is the equivalent of almost $3.5 today, but what about the other way around? What would a million dollars be worth today?
Well, it would be worth only one million dollars.
This is why investing is important. Money loses purchasing power over time. If you want to save for retirement, money now will buy you less in the future and investing will help you keep pace and grow your money.
First Steps
The first step toward investing, especially if you have little to no money to invest, is to create a budget. The reason for this is you will want to see where your money is coming from and where it is going each week and month.
From here you can start looking for ways to reduce spending and maximize the amount that you have to invest, be it $5 a week or $100 a week.
Believe me, even a small amount adds up and the more the more you do it, the easier it becomes. It is very motivating to see your money grow and even simple steps can make a big difference.
Set a Goal
Goal setting is powerful. It gives you a target to aim for and something to gauge how well you are doing against. If you are short of your goal, you can use that to find ways to do better. If you surpass your goal, great job! You know you are doing well and what you are doing is working.
Set short term goals to gauge your progress toward your long term goals.
If your long term goal is to retire early, set short term goals that will challenge you to get there. Use these to gauge your progress weekly, monthly, and yearly, and adjust as necessary.
Goal setting can be fun. You can set multiple levels of goals and have landmark goals on your way to a really challenging goal. Make sure to give yourself some easy wins. Any win is a win, especially when just starting out.
Be creative and ambitious, but also don’t set yourself up for failure.
Have the Right Financial Mindset
Having the right financial mindset is absolutely crucial to your financial success and while starting and maintaining a budget and setting goals are key, really being mindful and creating good money habits are what will get you to where you want to go.
Be committed to getting this right and making this work. Things will not always be easy and will not always go the way you want but if you persevere, good things will happen.
Take a look at Why the Proper Financial Mindset is so Important after this for more on how to take charge of your mindset and your finances.
Getting Started
You’ve budgeted, you’ve got a good understanding of your money overall, including your income and expenses. You’ve set aside some money to invest. Now what?
There are really several options, depending on your goals, risk tolerance, etc.
Let’s take a look at some of the options.
Make contributions to your employer sponsored retirement plan
Did I just remind you that this was an option, or are you already enrolled in your employer’s retirement plan? According to the Bureau of Labor Statistics, out of employees with access to an employer sponsored retirement plan, only 78% participated. While this isn’t so bad, that is still over 20% of people who do not participate.
If you are in the 20% of employees not participating, this can be a great place to start investing. Not only will this come out of your paycheck but it will reduce your taxable income. Some employers will even match your contribution up to a certain amount. This is free money.
If you already participate in your employer’s plan, this can still be a great way to increase your investing in small amounts and in a way that you will likely not feel day to day.
This is a great place to challenge yourself with your investing. Set goals for your percentage contribution and try to increase your amount year to year.
Some employers even offer free retirement workshops that can be a great place to learn more about their retirement plans and strategies for maximizing your investment.
Start an IRA
IRAs are retirement investment accounts that can be contributed to pre tax – for traditional IRAs – or after tax for Roth IRAs. Both offer their own tax advantages and disadvantages.
While there is a maximum contribution limit per year depending on various factors including income and age, there is no minimum to start one.
IRAs are offered at many financial institutions, through banks, and robo-advisors and are an important option to consider when planning your retirement, which is the key word here. This is a retirement focused investment with penalties if withdrawals are made before age 59 ½, barring some exceptions. However, considering the tax benefits and the low barrier to entry, starting an IRA earlier than later is another great way to start investing, even if you don’t have a lot to invest.
Invest in Mutual Funds
Investing in mutual funds is great because you are investing in a professionally managed portfolio as part of a pool of investors. Vanguard and Fidelity might come to mind when thinking of mutual funds.
You may also think of minimum investment amounts that may price you out of setting up investments with these financial services companies. Thankfully, Fidelity offers mutual funds with no minimum investment. There are also several companies offering very low minimums.
This means that you can get started right away and not spend countless months saving up to start investing.
Use a Robo-Advisor to Invest and Save
If quick, convenient, and cool (sometimes it matters) are something that you would like to be a part of your investing, there are companies out there that will help you invest and save with minimal effort.
You’ve probably heard of Robinhood but have you heard of Betterment? And did you know that Charles Schwab has an app? There are some fantastic tools out there that can help you get started, even if you only have only a little money to invest.
Robinhood doesn’t offer mutual funds or bonds but does allow you to buy and sell stocks and cryptocurrency with no minimums. Coupled with its easy to use format, this can be a really good way to get started dabbling in the stock market without investing a lot of money up front.
Robinhood also allows you to purchase fractional shares, meaning if you want to purchase a share in a company that is a little out of your price range, you can. Purchases of $1 toward a portion of a share are possible which can help you build a more diversified investment portfolio.
Betterment is another option worth considering, offering automated portfolio management, which can take away a lot of the stress and confusion of getting started investing. Purchasing fractional shares is also an option with Betterment and has a minimum investment of only $10.
Another great feature of Betterment is the automatic rebalancing of your portfolio. You can select percentage targets for your investments, say for example 50% stocks and 50% bonds, if your percentage deviates more than 3%, your portfolio will be adjusted automatically according to your targeted allocation.
Why does this matter? Distributing risk across your investments makes for less risky investing. If, for example, you have 90% of your investments in stocks and 10% in bonds and all of sudden the stock market crashes, 90% of your investments just got hit hard.
However, a more even split divides the risk more evenly and allows you to decide how much risk you are willing to take on in your portfolio. The allocation between types of investments will fluctuate depending on the success of the differing investments, increasing one type in proportion to the others.
“Trick” Yourself into Saving and Investing with Just Pennies
One app that I think serves as a fantastic way to “trick” yourself into saving and then investing is Acorns.
Acorns uses a really neat Round-Up feature that will link your bank accounts and track transactions in order to round up purchases, investing this “excess” money.
This is an excellent way to trick yourself into investing, using money that you won’t notice is missing. Acorns also keeps things simple which makes it a great way for those new to investing while utilizing technology to streamline the whole process within a great app.
If you are struggling getting started saving and investing, Acorns could be a good place to start, after creating a budget, of course.
Invest in Yourself
I wanted to add this in here because investing in yourself is really the first step you should take and it doesn’t take a lot, if any, money.
Researching and educating yourself is the best thing you can do for your financial future. Understanding the fundamentals and building a solid financial foundation to stand on is crucial in financial success.
How do you educate yourself? You don’t need a degree or certifications to have good financial sense, you just need to know the basics. That starts with understanding your own financial situation and that starts with setting up a budget.
If you’ve never created a budget before or it’s been a while, I recommend taking a look at my blog post, How to Create a Budget, where I go over some simple and easy ways to get started.
I would also download our free Budget Toolbox. It has 14 printable templates including a simple budget to get you started as well as tons of helpful tools like a subscription tracker and a bunch more.
Conclusion
There are countless ways to invest and many allow you to get started with very little money. The important thing is to start. Think about where you want to be 1 year from now and then 10 years from now and always keep that in mind. What can you do today that your future self will thank you for?
In the end, this is your decision and your money. The level of risk you are willing to take is up to you and the consequences of these decisions are yours.
The best thing you can do is make your best effort to inform yourself and understand what you are doing and why you are doing it. The worst thing you can do is not invest at all. Just make sure to always know your goals, have a plan, and be patient.
Happy investing!
