“Invest early and often. Make time for friends, and start setting aside money for your goals as soon as you can in good markets and in bad.” Vanguard Investment
Investing is accessible to everyone regardless the size of your monthly paycheck or bank account. There are plenty of small investment ideas for as little as $20 or as much as $10,000. Everyone needs to start somewhere. In fact, if you’re just beginning your investing journey, it’s smart investing practice to start small.
When it comes to investing, “small” means something different to everyone. And, there are a few small investment ideas based on your budget. Over time, even small investments can reap big returns.
Yet, according to Goldman Sachs, stock ownership is extremely concentrated among the top 1% of Americans. As a result, the market’s performance affects households making up the wealthiest 1% of Americans much more significantly than the other 99%.
“The wealthiest 0.1% and 1% of households now own about 17% and 50% of total household equities (stocks, bonds and mutual funds) respectively, up significantly from 13% and 39% in the late 80s,” Daan Struyven, Goldman Sachs’s chief economist said.
In contrast, the bottom 50% of Americans owns 0.5% of household equities (stocks, bonds and mutual funds).
Start investing
The perfect time to start investing is now. It’s easy to imagine yourself investing money when you’re older, wiser and richer. However, you don’t need to have a large sum of money to make investing worthwhile.
It’s never too late to start, but the sooner you begin, the better. Your investment will have more time to reap the rewards of long-term compounding. Compounding happens when your investment earns money, and those earnings are reinvested for continued growth.
A program of regular investment cannot assure building wealth or protect against a loss in declining markets. A continuous or periodic investment plan involves investment in shares over the long-term regardless of fluctuating price levels and market volatility. You should consider your financial ability to continue purchasing shares during periods of low price levels and high market volatility.
Stocks and bonds are the building blocks of a long-term investment strategy.
With the right strategy, starting small can be an advantage. And, whether you’re investing with small money or big money, you will follow the same basic investing strategy. The best way to invest $20 is in fact, the best way to invest $10,000. Investing is always investing.
The value of the investment, versus the price you pay for an asset, is always the top priority. You first want to consider the value of the asst you want to invest, or “how much the thing you want to invest in is actually worth”. Then, what is the price? If the price is less than the value, then you’re off to a good start.
There are lots of different types of investments you can make, but not all investments are great for small amounts of money. For example, you can’t invest in real estate with $500, and even though you can invest $500 in Exchange Traded Funds and bonds, it doesn’t mean you should.
If you put $500 in ETFs or mutual funds each year for the next 30 years and get the long-term historical return of 7%, you’ll have in 30 years approximately $45,000 (less fees for mutual funds).
Investing in bonds with a historical return of 5% over the next 30 years, your investment will grow to around $35,000. Bonds may be the safest way to invest, but how safe is a retirement of $35,000?
What asset will make you the most wealth, the answer is almost always investing in stocks over the long-term. Historically, the stock market has returned 7% over the long term.
The number one thing beginning investors typically say that holds them back from making even the smallest investment: fear of the stock market.
Overcome Your Fears of Investing in the Stock Market
The stock market can be scary and risky to both beginning and seasoned investors if you don’t know what you’re doing. But one of the key principles of investing is to invest only in businesses you know and understand. You can overcome the fear and risk of the stock market if you understand the company and industry you are investing.
It important to understand that when you purchase stocks, you are buying partial ownership of a company. Thus, putting money into things you don’t understand is not investing. It’s speculation and speculating on stocks is equitable to gambling. Regretfully, that’s how most small retail investors retirement and brokerage accounts are managed.
That’s why you should consider learning how to invest. Which is when you buy wonderful businesses you understand at undervalued prices that guarantee great returns. If you do this, you will be able to overcome your fear of investing and set yourself up for success.
“Risk comes from not knowing what you are doing.” – Warren Buffett
Can’t stress enough how important it is to just start.
It is better to start with small investments and add to them over time than to wait and lose out on great returns as well as the power of compounding interest. Every day you don’t invest you are losing out on compound interest. With compound interest, when your money grows, its growth is also invested.
There’s a tool called The Rule of 72 that does a good job of explaining the power of compounding interest and will show you just how fast your money can double. This is how even small investments can pay big dividends.
Buy wonderful companies at attractive prices.
If you really want to learn how to invest, it takes a good amount of due diligence and patience but the long-term payoff is worth it. By following smart investment practices that have made people like Warren Buffett extremely wealthy, you will not make money fast but you will make more money over the long term.
Warren Buffett started with a small amount of money and he turned it into more than $80 billion. This goes to show that it isn’t about the money you have, it’s about the knowledge you have, the patience and the long term perspective.
That’s good news if all you have to invest is a small amount. It means there are no real barriers to building wealth if you’re willing to work hard and learn. When you know how to invest like the wealthy, you won’t ever have to risk losing all of your money to do it. This isn’t Las Vegas or is it gambling.
Make A Promise to Yourself
You have a small amount of money to invest, but are you really ready to put your money where your mouth is? If so, make a promise to yourself that you are going to do your due diligence to find the right companies, buy them at attractive prices, and double your $1000 over the next 5 years.
Once you have made that commitment, the key fact to understand is that you make money by buying wonderful companies and buying them on sale.
A wonderful company, according to Charlie Munger, partner of Warren Buffett, have four things you’ve got to focus on when you invest your $1000, or any amount of money, in a company:
- Number one, be sure you’re capable of understanding the business that you’re getting into.
- Number two, be sure that this business has this thing that we call a moat: something deeply embedded in it that protects it from the competition.
- Number three, make sure that the management team is made up of people who share your values, have integrity, and are talented.
- And finally, make sure you buy it on sale. “Sale” means at a purchase price with a margin of safety.
If you know the Meaning behind the company, it has a Moat to protect it from competition, the Management is trustworthy, and you can buy it with a Margin of safety that will give you 15% returns year over year, it is a great investment.
When it comes to making great investments, it’s really not about the amount you’re starting with, it’s about the strategy you’re using. The right strategy is going to continue to grow that initial investment over time. Even if you’re starting with a small amount of money, if you’re making an average of 15% returns year over year, you’re doing good.
Consider Risk
Typically, more risk = more reward, but that doesn’t mean you should throw away everything you learned above. You can minimize your risk and maximize your reward by investing in wonderful businesses on sale. Yes, even if you’re only investing with $500. This initial investment, while small, will help you get more comfortable with “the risk” of investing.
Starting small investment is totally fine – baby steps are better than no progress at all. The fact that you’re even thinking about investing when you only have $20 means you’re in the right mindset. One of the best things that you can do to begin investing when you have very little money is to form good habits. Practice these good habits with $20 and you’ll have a good financial future ahead of you.
No investment is too small. Small investments such as $20 still grow, especially when you invest $20 on a regular schedule. That’s really all it takes. Not only will your $20 investment grow, but it will also help you conquer your fear and keep your promise to yourself. You can start investing even with a small amount of money. Everyone needs to start somewhere.
Don’t Wait
You can start forming good habits by taking money out to invest as soon as you receive your paycheck.
Most often, people end up taking the exact opposite approach, waiting to see how much money they have left over before they invest. However, if you wait to see how much money you have left over before investing it, the number will almost always be a big ‘ol zero.
Instead, invest your $20 straight out of your paycheck and watch it work for you. Setting aside money to invest right away, even as little as $20, can become a natural, nearly subconscious act when you do it regularly.
Source: Phil Town Rule #1 Investing
Avoid Money Traps
It’s simply too easy to spend money rather than investing it if you make spending it an option. Spending your hard earned money on things like luxury vehicles, big houses, expensive vacations and weekend nights out can mean you have less to invest. Avoid these money traps and focus on your long term financial goals and the promise you made to yourself. Take your $20 and invest it in a great company rather than its fancy product.
Don’t Just Put Assets in a Saving Account
Saving isn’t inherently bad, but if you want to get a great return on your money and create generational wealth, it won’t happen by saving it. Most Saving accounts only offer 2% interest, which means you can hardly beat inflation, which means your money won’t really grow at all.
Think of your investment account as your saving account and you’ll be well on your way to “saving” $10,000 this year.
No investment is too small. Small investments such as $20 still grow, especially when you invest $20 on a regular schedule. That’s really all it takes. Not only will your $20 investment grow, but it will also help you conquer your fear and keep your promise to yourself.
How to Invest
By now, you should know you can start investing even with a small amount of money. Everyone needs to start somewhere. Investing is something anyone can succeed at with the right approach, no matter how much or how little money they are starting with.
When you don’t have any money, you have to step out on a limb. Take some chances, put what money you do have to use, and start climbing your way up. Again, everyone has to start from somewhere, and there’s no such thing as having too little to invest.
Benefits of Investing
There are advantages to investing with small amounts of money as well. With the right approach and by taking the right risks (safe ones) you can make the most out of small investments.
Starting Sooner
Investing when you have little money means that you’re starting to invest sooner rather than later. When you start now, even small amounts of money put into the market can grow into legitimate sums of money as the years go by.
Continue to Learn
Investing isn’t about just jumping in with $1,000 and it’s not about waiting until you have more to jump in with. It’s about finding wonderful businesses you want to own and finding the right time to buy them. With these small investment ideas, you can start right now whether you have $1000, $500, or $20 to invest.
Follow the lead of the best investors and take the next step in your investing journey by continuing to learn more.
Investing…get going, get growing and continue to learn.
Investing money involves some risk, but be aware that not investing also poses a risk, because you’re missing out on the opportunity to build wealth for the future. To help manage investment risks, it’s important to choose a portfolio that’s designed for you.
References:
- https://www.ruleoneinvesting.com/blog/investing-news-and-tips/small-investment-ideas-for-investing-500/
- https://www.navyfederal.org/resources/articles/personal-finance/how-to-start-investing.html
- https://retirementplans.vanguard.com/VGApp/pe/edu/catalog/what-are-the-investing-basics/1