How To Invest $20,
$100 and $1,000+
Got only $20 to put away right now?
You can use it to buy shares in Pfizer, Pepsi, Exxon Mobil, Johnson &
Johnson or Paychex to name a few of more than a thousand options available.
What about $100 or $1,000? Your options are even greater.
We are not here to tell you where to invest your money. We will not lay
out a handful of stocks on a "buy" list, bit what we can tell you is how
you can invest your money -- the mechanics of investing small, large,
and medium amounts of cash. We can even help you choose a broker.
How to invest $20
Let's start with $20. We are going to assume that you have already paid
off any high-interest debt and that you have some money stashed in a safe
place (like a savings or money market account) that you can get to quickly
in case of an emergency expense. Now you find yourself with a little extra
dough and you want to begin investing for your future.
Is it even worth it to invest such a small sum?
Of course! One of the best ways to invest small amounts of money cheaply
is through Dividend Reinvestment Plans (DRPs), also known as Drips. They
and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass
brokers (and their commissions) by buying stock directly from the companies
or their agents.
More than 1,000 major corporations offer these types of stock plans, many
of them with fees low enough (or free) to make it worthwhile to invest
as little as $20 or $30 at a time. Drips are ideal for those who are starting
out with small amounts to invest and want to make frequent purchases (dollar-cost
averaging). Once you are in the plan, you can set up an automatic payment
plan, and you do not even have to buy a full share each time you make
While you have to keep good records for tax purposes, Drips may be one
of the surest, steadiest ways to build wealth over your lifetime. (For
more details on Drips, see "What if I can only invest small amounts of
money every month?"
How to invest a couple of hundred bucks
After rummaging through your spare change jar you have tallied up a few
hundred bucks. Consider investing it in an index fund. An index fund that
tracks the S&P 500 is your entry into an investment that has traditionally
returned 11% a year.
There are some index funds that require as little as $250 for you to call
yourself an owner. This low minimum is usually restricted to IRAs (Individual
Retirement Accounts). After your initial investment, you can add as much
money as frequently as you like for no additional costs or commissions.
You purchase index funds directly from mutual fund companies, so there
are no commissions to pay to a middleman.
If you have a few hundred dollars to start with, then this is a great,
low-cost way to establish an instant, widely diversified portfolio.
How to invest $500
Once you are up to $500, your investment options open up a bit more. You
can still buy an index fund, and will now have your pick of fund companies
that have higher minimum initial investment requirements. This freedom
will enable you to shop around for a fund with the lowest expense ratio.
You should also put some serious consideration into opening a discount
brokerage account. You will want to focus on the account option that best
serves your needs -- an account that has a minimum initial deposit, or
even none at all. That means you can open up an account with whatever
investing money you have available, and start researching and perhaps
purchasing individual companies.
The key here is to keep your costs of investing (including brokerage fees)
to less than 2% of the transaction value. So if you are planning to add
to your position in stocks a few times a month, a Drip or an index fund
may still be the way to go.
How to invest $1,000+
Obviously, with $1,000 you can open up a discount brokerage account, but
look at the rewards if you can scrape up an additional $1,000 a year to
add to your original investment:
Say you have got 40 years until retirement. If you start with $1,000 and
invest an additional $1,000 each year, and your money earns 10% annually,
then when you are ready to retire at age 65, you will have $532,111.07.
That seems worth it to us. If you have earned income, you can set up a
Roth IRA, and you will not even pay any taxes on that $532K when you withdraw
it. Your case may vary, so use our handy savings calculator section to play with
Again, even at this level, the key is to keep fees from eating up your
earnings. So make sure that the costs of investing (including brokerage
commissions, stamps to mail in checks, and books that help you learn to
invest) are less than 2% of your account's overall worth. Nowadays, with
such low commissions being offered by discount brokers, it is easy to
manage your account for much less than 2% of your assets annually.