by Just starting your investment journey and don’t have a lot to spend? How can you invest small amounts of money? And is it even worth investing small amounts of money? The answer, is absolutely YES and I’ll show you how!
Full disclosure: Wall Street Fat Cat may be affiliate partners with some of the products listed in this post. With every sign up, Wall Street Fat Cat may receive a referral fee. Your support allows Wall Street Fat Cat to continue posting useful, free content.
Let’s say you save just $1 a day ($365 / year), at a 10% growth rate. Over 40 years your total contributions would be $14,600 and the amount of growth you’ll receive is $146,946, a whopping 1006% return!
Little investments can add up and grow exponentially via compound interest over time.
The beauty about compound interest is that your interest makes more interest, and continues month after month, year after year. For more info on how compound interest works, feel free to check out my article here.
Here are just a few ways on how you can invest small amounts of money for big gains later.
Contents
High Yield Savings Accounts
Even with small amounts of money, you can open a high-yield savings account.
A savings account is a good place to put your money if you need immediate access to cash within a moment’s notice. It’s good for just starting your investment journey, or building an emergency fund.
I personally prefer Capital One’s 360 Performance Savings Account which claims to earn 5X the national average savings rate.
As of this writing, there is no minimum balance to create a Capital One Savings Account.
Your savings are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000.
This means that your savings, up to $250,000, will be protected even if your banking institution goes into default or fails.
I suggest you do your own research to get the best rates with the greatest convenience. You can also compare rates at other banks here.
Certificates of Deposit (CDs)
With small amounts of money, you can also own certificates of deposit.
A Certificate of Deposit, or CD, is a bank account that holds your money for a designated amount of time (6-months, 1-year, 2-years, etc.) In return, you will be rewarded with an interest rate that is usually higher than what you’d receive in a high-yield savings account.
You’ll USUALLY receive a higher return in exchange for having your money locked up for a longer period of time. With a savings account, you can withdraw your money at any time. But if your money is in a certificate of deposit, you will have to pay a sizeable fee if you try to withdraw your money before the end of the holding period.
I say “usually receive a higher return”, but these are currently UNUSUAL times.
For example, as of this writing in September 2020, Capital One’s 5-year CD pays 0.50% interest, while its savings account provides a higher return at 0.65%.
Why is this happening? It could be that the bank is seeing high demand for CDs, and customers are willing to accept a lower rate.
For Capital One accounts, as of this writing, there is no minimum balance to open a CD account.
Your savings are once again guaranteed by FDIC for up to $250,000.
You can also compare CD rates at other banks here.
Employer-Sponsored Retirement Plans
Savings accounts are great, but they offer low returns. Can you invest money in stocks with small amounts of money?
Yes! Even with small amounts of money, from a few hundred dollars to just a few dollars, you can invest in your employer-sponsored retirement plans.
Some of the common plans include 401(k), Roth 401(k), IRA, and Roth IRA.
You can check out my retirement planning article here to determine which plan is right for you.
Most important tip: Make use of employer match programs!
Some employers offers a match that is essentially free money.
For example, let’s say your employer will match 100% of your contributions, up to 5% of your salary.
If you make $50,000 a year, and you contribute 5% of that into your retirement fund ($2,500), then your employer will match that amount and provide you $2,500!
That’s $2,500 in FREE MONEY.
When free money is being offered (With no strings attached, of course), I say take it!
Pay off High-Interest Debt
You can and should invest small amounts of money to pay off high-interest debt.
Notice how I was very specific in mentioning “high-interest.”
Why?
If you have high-interest debt, for example a credit card balance which is charging you a 19% interest rate, it makes sense to pay it off right away. There’s know way you can make a 19% interest rate in the stock market on a reliable basis.
If you have low-interest debt, for example a mortgage that is charging you 3% interest, it makes more sense to NOT pay it off right away, considering you can instead put your money in the stock market which could provide you close to a 10%-11% return, year after year (Source: Investopedia).
If you are paying the minimums on your low-interest debt, and investing the rest in the stock market, you are essentially pocketing the difference, or 7%.
Schwab (brokerage accounts)
With small amounts of money, your money can experience exponential growth when invested in stocks in a brokerage account.
Some great options that I recommend based on personal experience is Schwab and Vanguard.
You can invest in index funds or ETFs to get stock market returns which have averaged 10% -11% over the past 90 years.
This is a substantially higher return than what you’d normally see in a savings account or CD.
The downside to investing in the stock market is the higher volatility and potential for losses.
Furthermore, your returns are not guaranteed by FDIC.
Some years you could experience massive losses, like the 56.4% loss between 2007-2009 and the 49.1% loss between 2000-2002. Source: NBC News
However, if you hold your investments during market downturns, your investments will typically fully recover. The market has fully recovered from every single past recession.
With Schwab, you can open an account with no minimum.
Schwab’s S&P 500 index fund (SWPPX) has returned a healthy 13.80% annually over the past 10 years!
You can invest in SWPPX with as little as $1, according to their website.
If index funds are not your flavor, you can consider different types of investments like bonds, REITs, mutual funds, ETFs, treasury bills and more. For more info on 9 different types of investments, check out my article here.
Bonus
Robinhood
I do not personally own a Robinhood account, but I’ve seen a few reviews about it.
I’m NOT recommending Robinhood, but just thought I’d mention it for informational purposes.
It seems to be very popular with people who are just starting their investment journey because it easy to open a Robinhood account with little money. From what I’ve read online, there is no minimum deposit.
That means you can invest $1 here, $5 there, etc.
The downside is that people tend to use Robinhood for day trading. Day trading is often a perilous activity, because the probability of you timing the market correctly by buying low and selling high is slim to none. To understand why market timing is futile, you can check out my market timing article here.
Furthermore, I’ve heard that Robinhood has gamified features, which gives you virtual awards and celebrations when you achieve a few accomplishments. All of this seems fun and encourages more active trading.
But here’s the hard truth: Investing should NOT BE FUN.
If investing is fun, you’re doing it wrong.
Investing should be a long, slow, boring, process! But one that should reliably grow your wealth over time, NOT over night.
Investing should be a “Set it and Forget It” process. Make automatic investments on a regular basis (bi-weekly or monthly) and utilize dollar cost averaging. These are the two keys to success.
If investing were like a Vegas slot machine with bright lights, tantalizing sound, and drink service, then you’re in the wrong place!
Knowledge (books)
One of the best ways to invest small amounts of money is to build your knowledge.
There are plenty of free resources you can utilize to build your investment knowledge including:
If you want to take it a step further, you can rent books from your public library, and even get it delivered to your kindle for free! All you need is an account with Overdrive or the Libby app and you can rent from a selection of thousands of digital books offered by your local library. I’ve rented dozens if not hundreds of books this way, and it has saved me a lot of money! More info on how to do it here.
If the book you want isn’t available for free rental, you can make a small purchase, even if it’s $10 or $15 at a time. A small investment goes a HUGE way when it comes to increasing your knowledge and confidence about investing. One book I highly recommend is The Millionaire Next Door by Thomas Stanley.
Books not only expand your investing knowledge, but open you up to new ideas, including entrepreneurial ideas and other opportunities you might not have thought of. They build your vocabulary and strengthen your critical thinking skills. Keep reading!
Education
How much would you invest to make $160,000 over two years?
$1,000,000?
$500,000?
How about just a measly $80K? (Yes I am joking when I say “just”)
That’s approximately how much I invested for my MBA degree, which I attribute to a 200% return, if not more. I explain my entire MBA degree process in my article here.
$80K is not a small amount of money by any means.
But if you qualify for scholarships, grants, and loans, depending on your situation, you can probably drastically minimize the expense.
I absolutely don’t recommend it for everybody. But if you’re passionate about learning, finance, business, and developing your skills to continue climbing the corporate ladder or become an entrepreneur, it is definitely something worth considering.
It can build your confidence, introduce you to new networks, open new doors, and most importantly provide a healthy return on investment if you do it correctly and put in the effort.
Putting it all together
You don’t need a ton of money to start your investment journey. Even small amounts of savings and investments can grow tremendously over time.
Several ways to invest small amounts of money, many of which do not require a minimum balance are:
- High-yield savings accounts
- Certificates of deposit
- Employer sponsored retirement plans
- Paying off high-interest debt
- Brokerage accounts
You can take it a step further and look into Robinhood (but don’t try to time the market), building your knowledge base, and investing in your education. Investing, even with just small amounts of money at a time, can lead to HUGE gains down the line.
Let me know your thoughts below! Which methods do you use to invest small amounts of money?
Full disclosure: Wall Street Fat Cat may be affiliate partners with some of the products listed in this post. With every sign up, Wall Street Fat Cat may receive a referral fee. Your support allows Wall Street Fat Cat to continue posting useful, free content.
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