How to Invest If You Don't Have Much Money

Every once in awhile I'll get an email or a comment that will say something like, "yeah, that's a good strategy if you have the money to invest, but what if you don't have enough to make the fund minimums. Then what should you do?"

Well, USA Today takes a shot at answering the question and gives some guidance on how to start investing with a little bit of money. Their thoughts:

Ariel fund, for example, normally requires $1,000 to start a regular taxable account. But you can open an IRA at Ariel for just $250 (ARGFX).

A few funds will let you start with $50 via an automatic investment program, or AIP. An AIP allows the fund company to tap your bank account on a regular schedule. You promise to keep investing until you reach the fund's normal minimum.

The AARP Moderate fund (AAMDX) is one place to start. In fact, all the AARP funds have low minimums. You don't have to be 50 or older to invest, as you'd have to be to join the advocacy group itself.

You might also consider T. Rowe Price Balanced fund (RPBAX), which has had consistently above-average performance the past 15 years. T. Rowe allows you to start a $50 AIP in many of its funds.

I started investing a long time ago (almost a couple decades ago now), and I don't remember Vanguard having minimums that were that high then. Maybe they did and I just saved up to meet them. I also did a good amount of investing through my 401ks through the year -- I know none of these had any minimums. This could be a viable option for those of you who don't have enough money to meet the minimums of companies/funds you want to invest in.

Comments

[Margo]

I never understand this question. If you don't have some cash savings (enough to cover the fund minimum and still have some left), you probably can't afford the risks of investing. Given any cost to maintain an account, and fees per trade, in the 1-3 year range, the investment return on small sums is not enough more than the return on a high yield bank account to justify that risk.

For example:

Vanguard account

$50/mo *12 = $600
"Average" year - gain 10%. New balance = $628.08
Less the $20 Vanguard annual fee. EOY balance = $608.08
Net gain - 1.35% or $8.08

High Yield Savings:
$50/mo *12 = $600
current yield - gain 3%. New balance = $ 608.32
No fees.
Net gain - 1.39% or $8.32

In this case, your results are essentially the same, even though you took on significantly more risk with the investing option and had one of the lowest cost accounts possible.

Even if you factor in taxes on the HYS, the benefit of investing is negligible in Year 1.

Vanguard IRA:
Net gain - 1.35% or $8.08
Net gain - interest $8.32 - 35% taxes = after tax gain $5.41

Over the long run, the difference in gains is more significant. So too, does increasing the monthly contribution mitigate the negative impact of account fees - but that isn't the point of this article.

Even worse example - look at the 1 year difference between a Share Builder account and a savings account. At $4/trade, you'd have to contribute a little over $100/month and gain 10% to keep pace with the savings account at 3%.

Both examples show that this person would not be missing out on giant sums of money if, in the short run, she puts the $50/month into a savings account until the fund minimum is met.

[Almuliman]

This post made me think about my son's wanting to start investing - I created a spreadsheet with a pretty graph showing him how much money he'd have in 5, 10, 15 etc. years by saving $x each month with a particular average annual return. Got him very excited :-)

So now the problem is that he only has somewhere on the order of $10-15 to invest each month. What's the best way to get him started? If he has to accumulate for a year or more to reach the minimum to get into a particular fund, I'm afraid he might lose interest. There are also minimums for the AIPs in the funds I've seen. Going through something like ShareBuilder would only make sense with some sort of accumulation as well so fees don't eat, say, $4 each month for each trade.

I hope I'm not hijacking the thread, but does anybody have experience or thoughts on this quandary? It'll repeat with my 2 other kids too, in time :-)

Thanks.

[Melissa]

I love this question! I wish there was more advice. I'm a military spouse, a stay-at-home mother of a preschooler, and have a newborn due in less than two weeks. I read anything I can get my hands on regarding improving our financial situation and sometimes I get really discouraged. We have about $8k total debt (car and credit). That's down from $12.6k one year ago, $24k two years ago and $33.8k 2.5 years ago. We have a little over $2600 in an MMA and $20k in my Vanguard trad IRA and my husband's TSP. We're both in our early 30's. Currently we save about 16% of our income. But despite that, I'd still like to have at least 6 months in our MMA, open a ROTH IRA for my husband in addition to his TSP, open 529 plans for our children, and save at least $35k for a 10% down payment so we can be homeowners within the next five years. Additionally, I would love to invest in mutual/index funds. We can definitely afford an extra $50-$100/mo AIP. I just need to find the right funds without an initial $3000 investment. Doing so would deplete our savings. We only have $800 a month of disposable income and saving up for a $3000 buy-in will take too much time. We'll miss out on the lower cost of stocks right now...

So please, any advice on which index funds may be a good investment for us (initial investment waived with AIP) will be very welcome!! Thanks!

[lkdr95]

Before I started investing I had looked at a bunch of mutual funds but settled on TROW because of the AIP; if you enroll in AIP, you can open an account for $50 minimum and then Auto Invest every month. I looked at Vanguard but the $3000 minimum put me off along with the annual fee. I own TROW's New Era (PRNEX) and for a specialty natural resources fund, the expense is 0.64%.

If you're looking for a cheap way to invest in the NASDAQ-100 QQQQ ETF, go to www.qqqdirect.mystockfund.com, they allow you to invest as little as $10/month AIP in the QQQQ's, 1 monthly purchase for free, each additional purchases are $3.99/purchase; by the way I do use qqqdirect.

The whole point I think is to get people to start saving/investing early and the AIP is important in that it "forces" people to save without thinking..."out of sight, out of mind". Most people who are just beginning to incorporate smart financial decision-making into their lifestyle usually don't have thousands of dollars to invest anways, so AIP snowflaking is not a bad thing, of course maxing out your 401k or at least getting the match is a no-brainer too. Anywhoo my 2 cents.

[Big Cheese]

For people with a little money to invest I recommend to choose one of the two strategies:

1. Get a TD Ameritrade account and buy index funds or well researched individual stocks. Low commission charges and zero fees for holding securities.

2. Learn how to properly play Texas Holdem poker and take your savings and play against others to try and grow this. Yes, it's gambling but if you understand the game well and play well you can make a bit of money at the expense of others'.

-BC

[Megastar]

I don't know all the details but I have been hearing that you can invest in the currency market with as little as $100. Right now this is supposed to be very profitable because the dollar has declined so much. foreign currencies become that much more attractive

[Pamela Grundy]

I agree with the poster who points out that if you don't have enough money to meet a $1000 minimum you shouldn't even be thinking about investing. Open an IRA or a high-yield liquid savings account with a stable bank like ING, then when you have a set amount going into your ira and 6 months worth saved in you liquid account, play around in the stock market if you want.

I've heard Vegas is more fun though.

[Jenny]

Don't forget about Exchange-Traded funds. The minimum amount would be the cost of one share, which is much less than a fund minimum. For the S&P 500 ETF (SPY) that's around $130 right now. If you open a brokerage account at a site like Zecco you can get a few free trades a month. Diverting $50-100 a month to a brokerage account, and perhaps making one purchase every 2-3 months with accumulated cash, is a great way to get started.

I disagree that you shouldn't invest if you don't have $1k to start with. Some people might prefer to keep the majority of their savings in cash - as an emergency fund, or if they're saving for a purchase in the short term (like a house down payment). That doesn't mean they can't learn about the market with a small amount of money.

[Gerald]

You can buy ETF's through the sharebuilder.com with no minimums and very low transaction costs. If you have a Household Bank credit card, they'll even give you $50 free just for opening an account.

[Margo]

$4 isn't low when you are only investing $50/month. That's an 8% charge!