Make the Most of a Small Investing Budget
By Kayleigh Kulp
Laurie Itkin began investing at 24 with just $1,600 she received as an inheritance. By regularly adding small amounts of money to it in brokerage and retirement accounts, the financial advisor and author of “Every Woman Should Know Her Options” had a $1 million portfolio by age 40.
Sure, investing with a small budget may not result in an immediate windfall, but over time can amount to a substantial sum, thanks to compounded interest.
The hardest part is getting started.
“Many people say they will invest later when they have some more money, but the reality is that there is often not an ‘ideal’ time to invest,” says Terry McGuire, portfolio manager with Ridgewood Investments in Palo Verdes Estates, California.
Instead, getting the most out of a small budget – even $50 per month – is about getting the gains that help you reach your financial goals over time, while also making a habit of putting money away, says Mitch DeWitt, financial advisor at Walkner Condon Financial Advisors in Madison, Wisconsin. It’s about sticking to a plan, and not trying to time the market or cash in on the next big thing, he adds.
For the best shot at growing a small nest egg, no matter your financial goal, experts offer the following tips.
Put your money to work while you’re building your investment budget.
Many no-load brokerages such as Vanguard, Fidelity, and T. Rowe Price have mutual funds with low to no minimum investments. Others may be $1,000 or $3,000. While you’re waiting to accumulate the minimum for a fund you’d like to buy, put your money in an online savings account or certificate of deposit that pays 1 percent or more, says Morris Armstrong, a registered investment advisor for Armstrong Financial Strategies in Cheshire, Connecticut. This helps establish a habit of savings and investing that helps turn small sums into large ones.
“Over time, the investor will gain valuable experience and confidence as an investor, even with a small account,” McGuire says. “As the size of the account grows, the investor can then advance to even better investment options down the road.”
The most important thing to pay attention to when you’re working with a small portfolio is cost, says Phil Deerwester, a portfolio analyst with TGS Financial Advisors in Radnor, Pennsylvania.
“A $4.95 commission might sound like a good deal, but if you’re starting with $100, that’s 5 percent off the top, before you’ve even touched the markets,” he says. “It’s not true that you have to spend money to make money; look for mutual funds with low minimums and small expense ratios.”
Discount brokerages like Schwab, Vanguard or TD Ameritrade have low fees and non-commission mutual funds to make your money go further. Some brokerages also offer commission-free trades in select ETFs, which can bring the minimum initial investment down to the cost of a single ETF share — but remember, ETFs charge expenses just like mutual funds, so check those expense ratios.
When possible, invest in a tax-free or tax-deferred retirement vehicle such as a Roth IRA or traditional IRA, Itkin says. By not having to pay taxes on investment income each year, all the investment earnings stay in the account and compound, resulting in more earnings.
When investing in a fund, you have the option to be paid out your dividends or reinvest them. Reinvesting them will allow you to buy more shares and therefore grow your portfolio faster. Look into dividend reinvestment plans (DRIPs) from large companies, which require an investor to purchase at least one share of stock in the company, after which the investor can make additional contributions to purchase more shares over time, says McGuire.
Keep your money in for the long haul.
If saving and investing for the long term, you do not want to have to withdraw funds to pay off a debt, since you’ll miss out on gains. And if you withdraw funds from a retirement or financial independence account, there may be tax and early withdrawal penalties, says Peter J. Creedon, CEO of Crystal Brook Advisors in Mount Sinai, New York.
Make sure any funds, however small, are committed long enough to realize growth. But also don’t be discouraged if all you can afford is $100 per month.
“Investing $100 per month in an IRA at a 7 percent annual rate of return would grow to $122,000 in 30 years. If you can increase your contribution amount each time you get a raise or earn additional income, your money can grow ever larger,” Itkin says.
Investing is never without risk, but part of keeping a small investment budget growing healthily is minimizing losses, says Randy Kurtz, a chief investment officer of Behavior, a tech company aimed at creating portfolios with minimal risk.
Kurtz suggests retirement target dates or other balanced funds that allow you to obtain wide exposure to various types of asset classes and diversify your holdings.
You can also buy into index funds such as the Schwab Total Stock Market Index Fund, which has an annual expense ratio of .03 percent and no transaction fees, or the iShares Core S&P Total Stock Market ETF, which you can buy at Fidelity with a .03 percent expense ratio, no transaction fees, and no minimums, says Larry Solomon, director of investments and financial planning for OptiFour Integrated Wealth Management in McLean, Virginia.
Since ITOT is an exchange-traded fund, it trades like a single stock, so you generally need to purchase it in a whole number of shares. It currently trades at about $64.
While it’s important to give your investments careful consideration, it’s also important not to overthink your strategy, says Megan Gorman of Chequers Financial Management in San Francisco. “Often the best strategies are simple and elegant,” she says. “If you buy the same target retirement fund every month with $100, over 30 or 40 years, you will have likely made a good choice.”