01 Nov How to Start Investing with Little Money in 3 Steps
One of the top questions I get is how to start investing with little money. Many people want to become wealthy, but they don’t know how to take the first steps. It can feel overwhelming when you’re started from scratch, so in today’s post I am going to give you the three best ways I know how to start investing with little money: a savings account, a retirement account, and a brokerage account–in that order.
Before we go deeper into anything though, I want to give you a word of caution. Before jumping into any new endeavor, whether it’s real estate, business, the stock market, or anything else, you have to gain knowledge, understanding, and wisdom. Never invest in something you don’t understand.
How to Start Investing With Little Money
1.) Open a High-Yield Savings Account
The first way you can invest with little money is by starting a savings account. Now, this isn’t what people typically think of when they think about investing. However, if you don’t have much money to invest in real estate, a business, or the stock market, this is the perfect place to start.
Opt into a high-yield savings account. These accounts offer you more interest on the money you contribute than a traditional savings account. For instance, the average amount of interest on a regular savings account is .06%. High-yield savings accounts that don’t require additional fees hover around .50%. So, if you put $5,000 in a traditional savings account you’d make around $3 extra a year. In a high-yield account, that figure would jump to $25. It’s not much, but it’s also not bad for not doing anything other than opening an account. Other banks will offer as high as 2% APY ($100 per year for $5,000), but additional fees apply.
By investing in your own savings account, you are building wealth to invest in larger assets in the future. You can save for a down payment, and after you have a nest egg you’re comfortable with, you can contribute your additional cash to investments that have a higher return.
2.) Open a Retirement Account
The second thing you should invest in is a retirement account. When opening an account, it’s important to understand the key differences. [Check out this post on the differences between a Roth IRA and a Traditional IRA.] I typically encourage people to open a Roth IRA because they are not tax deferred, which means that you don’t have to pay taxes on the funds you withdraw from the account.
However, if your employer sponsors a traditional IRA, you should opt in. Many employers will contribute to or match your contributions–that’s free money, and it cancels out the tax benefits of a Roth. Another nice thing about employer-sponsored IRA’s is that the contribution typically comes out of your paycheck before you even see it. That means you don’t have to transfer the money in there yourself, and you aren’t tempted to spend it elsewhere!
3.) Open a Brokerage Account
A brokerage account is type of account used to buy and sell securities like stocks, bonds, and mutual funds. Essentially, it is bank account where a professional invests your money according to your goals and risk tolerance. Many brokerage accounts can be opened with a small minimal deposit–usually between $100 and $1,000. Some can also be opened with as little as $25. Make sure you start a brokerage account with an investment bank, such as Charles Schwab— not a traditional bank. Investment banks provide much stronger returns.
The reason you open a savings account before a brokerage account is because a savings account provides you with a financial cushion. Your balance in a brokerage account can fluctuate with the market. Therefore, you want to be able to ride out the lows if need be. Having money in savings before you invest lowers the possibility that you’ll lose money on an investment due to a financial pinch.
I hope this post has inspired you to start your wealth building journey, even if you don’t have a lot of money! Comment below the steps you are taking to getting started in investing.