Many people mistakenly think you have to be rich to invest. But what if you could learn how to invest with little money? It’s possible! Some methods require as little as $5 to start. And the sooner you start investing, the faster your money will grow, too.
In this article, we'll think outside the box a little and see how easy it is to invest with only a little money to spare. You'll learn all about the strategies and places that you can invest with little money so you can get started right away!
How to invest with little money: Leverage savings first
The key to learning how to invest with a small amount of money is to realize the value of saving money. Some of the tips below may not even feel like investing, but if you see a return on your ‘investment,’ you’re investing!
Here are five simple strategies to save a little money so you can invest even more.
1. Automate your savings
Think about the last time you saved money. Did you set aside a specific amount of your paycheck the day you got paid, or did you save AFTER you spent money all month?
We’re all guilty of it - we save after we spend. But what happens when there’s nothing left to save?
Instead, take the bull by the horns and save before you spend by paying yourself first. Create a budget and determine how much money you can set aside monthly, and make it a line item in your budget. Treat it like a bill, only automate it.
Most employers offer direct deposits. Instead of putting your entire check into your checking account, have some diverted to your savings account.
2. Pay off high-interest debt
Paying off debt probably doesn’t feel like saving money but think of it this way. If you’re paying the average 16.3% interest on your credit card debt, you’re losing 20% every time you don’t pay the balance in full.
When you pay the debt off, you have that much more money to invest. If you have a lot of consumer debt, you’re better off paying off the debt before investing, or you won’t realize the full potential of investing because you’re throwing the money at high-interest credit card debt.
3. Cut expenses and find creative ways to save money
You might be surprised at how much money you can save towards investing by cutting your budget and finding crazy ways to save money. It could be anything, but here are some great examples to start with:
- Use coupons
- Only shop sales
- Make a list before you shop, and don’t stray from it
- Bring a brown bag lunch to work instead of eating out
- Make meals at home instead of ordering out
- Find ways to entertain the family at home for free
- Swap kids’ clothes with friends with kids of different ages
- Sell items you no longer need
4. Optimize your taxes
Work with your tax advisor to lower your tax liabilities. Find ways to save on your taxes by taking the right deductions or using the right tax strategies. Talk with your tax advisor about ways to use losses on certain investments or businesses to offset capital gains and income in other areas.
5. Get free retirement money
If you work for a company and they offer a 401k, see if they also offer a 401k match. Many employers will match either dollar-for-dollar or 50% of what you contribute up to a certain point.
For example, your employer may match your contributions of up to 3% of your salary dollar-for-dollar, or they may match 50% of your contributions. If you make $75,000, that’s either $2,250 or $1,125 in free money. Don’t let that go!
Where to begin investing with little money
Once you find ways to save a little money, you probably wonder, how can I start investing with little money? The good news is there are many ways to invest with little money, and they aren’t intimidating. When we think of investing, we often think of busy investment advisors who only want to work with people with a lot of money.
It’s not like that anymore. There are many ways to DIY your investments with a little money. Here’s how to invest a small amount of money:
A savings account is how to invest with little money that is also low-risk. You may not think of a savings account as an investment, but if you’re earning interest, it’s an investment. It's a great place to keep your emergency fund and money for other short-term goals. Want to make your savings account even more valuable?
Open a high-yield savings account online. Banks offering savings accounts online only usually pay much higher interest rates than brick-and-mortar banks because they have much less overhead and pass the savings onto their clients.
If you want to jump head-first into investing but don’t want the hassle of making essential decisions yourself, consider a Robo-advisor. Some Robo-advisors like Acorns will even invest your spare change.
If you have a little more than spare change to invest, check out Robo-advisors like Robinhood or Wealthfront. You answer a few questions when you set up your account, deposit the funds, and they'll do the rest. Robo-advisors choose your portfolio for you and manage it, reallocating your funds as necessary.
The stock market
Anyone can invest in the stock market. You don’t have to be rich. You can buy full shares of stocks or if you want to invest in fractional shares, find a Robo-advisor that offers this option. When you buy fractional shares, you don’t own a full share of the stock, but you still earn a prorated amount of the earnings.
It’s a good idea to diversify your portfolio to avoid losing everything if an industry crashes. Invest in multiple sectors or types of stock to minimize your risk of a total loss.
Index funds and Exchange-traded funds (ETFs)
If you’d rather bundle your investments into one security, try index funds or Exchange-traded funds (ETFs). Index funds and ETFs can be a great way to diversify your investment versus buying stocks individually.
Index funds and ETFs track certain indexes, such as the S&P 500 (Made up of the 500 largest publicly-traded companies in the U.S). When you invest in one of these vehicles, it’s like investing in the entire index without buying individual securities for each company in the index.
Although they have their differences, both index funds and ETFs trade on the stock market, have low expense ratios, and are already diversified. Since they aren’t actively traded, you don’t have to worry about excessive trading fees.
An alternative is low-cost mutual funds but you must watch out for excessive trading fees with mutual funds. Since a fund manager actively manages mutual funds, the fees can get high if you aren’t careful.
Real Estate Investment Trusts (REITs)
Have you always wanted to invest in real estate but didn’t think you had the money? With REITs, you do. You invest a small amount into a company that owns and runs real estate and get a ‘piece of the pie’ along with hundreds or thousands of other investors.
The developer uses the funds contributed by multiple investors to help real estate developers afford their next piece of real estate. You can invest in a property’s equity or debt.
When you invest in equity, you earn a monthly cash flow based on the amount you invested, and when you invest in debt, you earn interest on your investment. REITs are a great way to invest in real estate without the burden of managing the physical real estate yourself.
Employer-sponsored retirement plans (One of the easiest ways how to invest with little money)
Your employer-sponsored retirement plan (401k, 403b, 457b, etc) typically don’t have a minimum investment requirement. While there’s a maximum amount you can invest, you can invest as little as you want.
This was one of the first ways I learned how to invest a small amount of money. I set aside 1% of my paycheck when I started working. It wasn’t much, but I knew that every dollar I put away today would be worth more tomorrow.
Don’t forget, if your employer matches any part of your contribution, it’s like getting free money, so finding every dollar you can invest in your 401k is worth it.
If you are risk-averse, consider savings bonds or Treasury securities. You won’t be able to retire on the funds, but it’s better than putting the money on your mattress or spending it. You can buy savings bonds with maturities as short as 30 days (minimal earnings) or as long as 30 years.
Only buy bonds you can afford to leave until maturity, or you won’t get the total return you’d hoped. Savings bonds are a great way for how to invest with little money. Plus you'll diversify your portfolio and keep at least a portion of your funds risk-free.
Invest in yourself (A great way for how to invest with little money)
Learning how to invest a small amount of money doesn't need to be hard if you remember to invest in yourself. It sounds crazy because how could there be any type of return on yourself, right? You are your largest asset, though. Investing in personal development means allowing yourself to grow.
Here are a few ways you can invest in yourself:
Learn new skills
One of the best ways to invest in yourself is to learn new skills. For instance, learning specific money-making skills can help you boost your income which means more money for you to invest.
Go back to school
There's no better way to invest in yourself than through education. If you've always wanted to start or finish a degree, then take the leap of faith and get started!
It's bound to open new doors for networking, learning, and career growth. Try to find ways to fund your education without student loans to prevent debt stress while getting your education.
Try a new career
Your career probably isn't something you think about when you ask yourself the question, 'how can I start investing with little money.' But, finding a fulfilling career can be a profitable way to begin investing with little money—both investing in yourself and your wallet.
Read self-help books
Wondering how to invest a small amount of money? Self-help books are a cheaper way to invest in your growth and development. Just head over to an online retailer or local bookstore to start checking out options for areas of your life that you'd like to improve.
Take continuing education courses
You don't need to take continuing education courses just to keep up with your certification requirements. You can register for classes online or at a local school for things you enjoy or pique your interest. For instance, you can take dance, art, and business classes, among others, to expand your mind.
You can learn how to invest with little money!
You don’t have to be rich to invest. If you learn how to invest with little money, you’ll see how easy it is to make your money grow. It becomes habit-forming and exciting to reach your financial goals, no matter how large. The key is to start somewhere, though, even if it means investing your spare change alone.
Learn more about investing with our completely free course! Taking this small step will better both your and your family's financial future. You can also learn more about investing and other personal finance topics by tuning in to the Clever Girls Know podcast and YouTube channel.