Four Small, Easy Ways to Start Investing
You don't need to set aside a large amount of money to start investing—in fact, as little as $20 is all you really need to get started.
There's a persistent and costly myth about investing, and it's that you have to have a lot of money to start. "You most definitely do not need a lot of money to start investing," says Jenny Jesup, CFP, planning coordinator at Bridgeworth Financial. In fact, people "who end up having a lot of money" owe their financial success, at least in part, to a habit of "consistently investing over many years," no matter the dollar amount, says Jesup. So, whether you have $20 or $2,000 to spare, now is the time to start—and here are four easy ways to build your financial portfolio.
Contribute to an employer-sponsored retirement plan.
If your employer offers a 401(k) or another type of retirement plan, then you should invest in it, says Jennifer L. Garcia, CFP, managing director of investments at the Garcia Private Wealth Group of Wells Fargo Advisors. This set-it-and-forget it method of investing has a bevy of benefits: Your contributions will be automatically deducted from your paychecks, which means you'll never forget to make a payment, and you can choose the amount to contribute—even as little as $20, says Garcia. But the benefits don't stop there. "Your investment will grow on a tax-deferred basis, meaning that you won't have to pay taxes on any of the earnings until you take your funds at retirement," says Garcia. And some employers even match your contributions, up to a certain amount. That's "free money" that you don't want to miss out on, as Jesup points out.
Start a traditional or Roth IRA.
If your employer doesn't offer a qualified retirement plan, you can still invest for your future by opening an IRA. There are two types of IRAs: traditional IRAs and Roth IRAs. A traditional IRA allows you to contribute pre-taxed money, which means your taxable income will be reduced—but you will have to pay taxes on the money when you withdraw them in retirement, Jesup says. When you contribute to a Roth IRA, you must do so with after-tax money, but you won't pay taxes on it when you withdraw it. Either type of IRA has a yearly contribution limit of $6,000, which means you can't invest more than that in a calendar year, but you can invest less. To set up an IRA, you'll can work with a management company, such as Fidelity or Vanguard.
Open a mutual fund.
Mutual funds are professionally managed funds that pool money from multiple people to make investments. Some may have minimum contributions to open, but they can be as little as $250; others don't require a minimum contribution to open as long as you set up recurring investments. "Think of [it] as paying yourself, just as you would pay a bill," says Garcia, who adds that "the sooner you start, the larger your nest egg will be as your funds will have more time to grow."
Buy fractional shares of Exchange Traded Funds.
Some financial institutions allow investors to buy fractional shares of Exchange Traded Funds, or ETFs. "This is a cost-effective way of buying into a broad-based index that will provide you with diversification with small investment minimums," says Garcia. "This type of investment will represent many companies, so it's as if you're buying a small piece of a big pie."
However you decide to invest your money, Garcia and Jesup both agree that the important thing is to start now. "Compound interest is an investor's best friend," says Garcia. "The longer your money stays invested, the better your chances are of growing your nest egg. It doesn't matter if you add to your savings monthly, quarterly or annually, but make yourself a promise to add consistently."