Many people think it requires a large sum of money to start investing. Here are 10 ways to invest small amounts of money that you might consider.
How to Invest Small Amounts of Money
1. Contribute to Your Employer-Sponsored Retirement Plan
If you work for an employer that offers a retirement plan like a 401(k), 403(b), a SIMPLE IRA or another type of defined contribution retirement plan, you have the opportunity to contribute a portion of your salary each pay period. Depending upon the rules of your plan, your contribution rate can be as little as 1% of your pay all the way up to the maximum annual limits of $19,000 and $25,000 for those 50 or over for 2019. These limits increase to $19,500 and $26,000 for 2020.
2. Contribute to an IRA
The annual limits for an IRA contribution are $6,000 for those under 50 and $7,000 for those who are 50 or over at any point during the year. The 2020 contribution limits are unchanged. Those limits are maximums, you can contribute any amount you are comfortable with up to those levels. These limits apply to all types of IRAs including traditional (both pre-tax and after-tax contributions) and Roth accounts.
3. Dividend Reinvestment Plans (DRIPs)
Dividend reinvestment plans are established by some companies to allow shareholders to reinvest their dividends from the stock into additional shares in the company as opposed to receiving these dividend payments in cash.
Generally, there are no, or very low fees connected with reinvesting in the shares. Additionally, DRIP participants are able to purchase fractional shares which is not the case when buying shares on the open market via their brokerage account.
Note that even though you are not receiving a cash payment, these dividends must be reported as taxable income.
DRIPs are a painless way to reinvest your dividends and have the money grow over time if the stock does well.
4. Robo Advisers
There are a number of robo advisers that have hit the investing scene over the past decade. These advisers use algorithms to allocate investors portfolios, usually employing a number of ETFs to implement these allocations.
Many robo advisers have low minimum investments, for example Betterment has no minimum required investment for its basic service.
Robo advisers can be a good way to invest in a managed, diversified portfolio with a low minimum investment.
5. Mutual Funds
The minimum investment for many mutual funds are often low. Some have no minimum, while others may be in the $500 to $3,000 range. Overall, these minimums are quite low in the whole scheme of things.
A number of fund companies offer lower minimums for investments made in IRA accounts or in custodial accounts for minors. They may also offer low or no minimums if you may regular periodic automatic investments into one or more of their funds.
6. Paying Down Debt
Although not an investment per se, applying an extra amount, even $50 or $100 per month toward paying down debt can be a solid investment in terms of the amount of money this can save you over time. Reducing the amount on a credit card, for example, can result in significant savings in the interest paid over time.
Paying extra on your monthly mortgage payment for homeowners can result in significant interest savings over time and can help you pay off your mortgage early.
These types of interest savings are very real and can add up to a lot of money over time that can be used for other purposes.
7. Treasury Securities
Treasury securities come in a range of maturities ranging form short-term Treasury Bills (also know as T-Bills) to longer term bonds. These are debt obligations of the United States Treasury and are perhaps the safest investment available. They can and do, however, fluctuate in value based on the direction of interest rates just as with any type of bond.
If you buy via the Treasurys online portal, Treasury Direct, you can buy Treasury securities for as little as $100. Your bid will be entered into the system and you will receive the securities at the average auction price for that session.
8. Investment Crowdfunding Platforms
Investment crowdfunding platforms allow investors to essentially pool their money to fund investments into start-up businesses, real estate ventures and other ventures.
The Jumpstart Your Business Startups Act of 2012 (the JOBS Act) opened up these types of investment opportunities to smaller investors. Previously, only accredited investors could invest in venture-capital-type opportunities.
Different crowdfunding platforms will have different minimums. Examples of crowdfunding investment platforms include: Kickfurther, Seedinvest and WeFunder.
Be sure you understand all of the rules and terms surrounding this type of investment including the ability to access some or all of your investment if needed. Many of these platforms have limited liquidity in terms of accessing your money. You will also want to perform due diligence on the platforms principals as to their background and experience in the venture capital space.
9. Round Up Your Purchases
Some banks and financial institutions have programs that will round up your purchases on a debit card to the next dollar. They will then deposit these amounts into a savings account in your name.
While this doesnt seem like a lot of money, it can add up over time. Think about how much you spend on things like gas, groceries and other purchases over the course of a given month. These small amounts can add up and this a is completely painless way to save a few extra dollars each month.
10. Health Savings Account (HSA)
If you have access to a high deductible health insurance plan via your employer or privately, you can fund a health savings account or HSA. These accounts let you defer as much $3,550 for a single person and $7,100 for a family into an HSA for 2020 on a pre-tax basis. You can add an additional $1,000 for those who are 55 or over.
Money comes out of the HSA tax-free for qualified medical expenses. If the money is not used during your working years, the HSA can serve as a retirement plan for covering medical expenses including Medicare premiums.
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