Updated on 12.02.15

Four Ways to Start Investing Without Much Money

Do you think investing is just for rich people, or at least people richer than you? It's not true.

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Photo: Mat

Everyone’s heard that investing can be a great way to grow your money over the long-term. But if you’re new to investing, it’s easy to feel overwhelmed by all the information and all the decisions you have to make. You may not feel like you’re actually qualified to be an “investor.”

And that feeling can get even stronger if you don’t have a lot of money to invest. You might feel like investing is for rich people, or at least for people richer than you, and you’ll just have to wait until you get there.

I’m here to tell you that that’s not true.

No matter how much money you have and how much you know about investing, you can get started right now with an investment plan that helps you reach your biggest long-term goals.

It’s pretty simple too. Here’s how to do it.

Step 1: Recognize What’s Important

If you listen to the news, you might think that investing is all about following the markets, knowing what’s happening in China, and finding the next hot tech company.

And while that stuff all makes for interesting news, it has almost nothing to do with your personal investment plan. When you start out, there are only two things that really matter:

1. Your Goals

You don’t need to worry about beating the market. You don’t need to invest in Apple so that you can be “in on the action.”

The only reason you’re investing is that you have some personal goals you’d like to achieve and you think that investing can help you reach them.

Those personal goals are the only goals that matter. And the clearer you get about what those goals are, the easier it will be to ignore all the distractions and create an investment plan that actually helps you reach them.

2. Your Savings Rate

When people talk about investing, they love to talk about returns. Specifically, they like to talk about different ways that you can try to improve your returns, presumably with the hope of reaching those personal goals sooner.

But here’s the truth: For the first decade of your investment life, your returns barely matter at all.

What really matters is your savings rate. The more you save, the easier it will be to reach your investment goals.

That might sound strange, but let’s say you have $5,000 in your investment account. If you get a 10% return, you’ll end up $500 more in your account. Not bad.

But what if you found a way to save another $5,000? That would have a much bigger impact, right? In fact, that contribution would be the equivalent of a 100% return on investment.

Once you’ve saved a lot of money, those returns will start having a bigger impact. But until then, you can stop worrying so much about returns and instead realize that the simple act of saving will get you further than anything else.

Step 2: Start with Your Company 401(k)

Once you know what you’re investing for and you’re ready to start saving, the easiest place to start is your company retirement plan. In most cases that’s probably a 401(k), but it may also be a 403(b) or 457(b).

There are two big reasons why your company plan is such a great place to start:

  1. There are no minimums. You can start contributing as little as a few dollars per paycheck in many cases.
  2. If your employer offers a matching contribution, your savings end up going twice as far as they would anywhere else.

All you have to do is talk to your HR department about having a small percentage automatically contributed from each paycheck and you’ll be on your way!

Step 3: Open an IRA

If you don’t have an employer retirement plan, or if your employer doesn’t offer a matching contribution, you could look into opening an IRA.

An IRA is a retirement account that works much like a 401(k), with the main difference being that you open it on your own instead of getting it through work.

And there are plenty of good, low-cost investment companies out there who will let you get started with either no minimum initial investment or relatively low minimums. Two of my personal favorites are Vanguard and Betterment.

Step 4: Use Low-Cost Target-Date Funds

Once you’ve started contributing, the next step is to choose your investments. Now remember, at this point your return matters much less than your savings rate, so you don’t need to stress about this decision too much.

Still, if you can make a good decision here it will help you out, so you might as well put a little thought into it.

Lucky for you, this can be pretty simple. The easiest way to do this well is to find something called a target-date fund. This is simply a single fund that invests in multiple other funds, meaning you can contribute to one thing and still have your money spread out across multiple types of investments.

The key here is to look for a target-date fund that’s low cost. After all, cost is one of the most important factors when it comes to investing, and the lower the better.

You can check out the fund’s expense ratio to figure out its cost. Anything from 0.05%-0.50% is relatively good.

Step 5: A Savings Account Is Perfectly Fine!

Although they can absolutely help, you don’t have to get all fancy with retirement accounts and mutual funds when you first start investing. A regular old savings account is a perfectly fine way to get started.

Remember, your savings rate is far and away the most important part of your investment plan at the start, so you shouldn’t worry too much about the low interest rate a savings account offers.

Plus, contributing to a savings account is an investment in your financial security. You never know when you’ll need some extra cash, and with a savings account you’ll have it available.

And you can always start with a savings account and move it to something like an IRA later on. You’re never stuck in one place.

Bottom line: There are no barriers between you and investing. All it takes is a few simple steps and you’ll be off and running.

Matt Becker is a fee-only financial planner and the founder of Mom and Dad Money, where he helps new parents take control of their money so they can take care of their families. His free book, The New Family Financial Road Map, guides parents through the all most important financial decisions that come with starting a family.

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