Review: How to Invest $50-$5,000

how toOne of the most frequent questions I see in emails and comments and in articles on other personal finance blogs is exactly how to invest a small sum of money. People often want to begin investing with only a small amount of money, and they’re really curious as to how to get started.

How to Invest $50-$5,000 is written just for that idea. This book has been in print for twenty years and is currently in its ninth edition, and it has one singular goal: to provide detailed instructions for small-scale investors who just want to get started in investing but are afraid to take that first step. How to Invest $50-$5,000 provides a bit of coaching and hand-holding for people who are just dipping their toes into investing for the first time.

What sort of advice does it give? Let’s open up the covers and see what knowledge is inside.

Digging into How to Invest $50-$5,000

Part One: Safe Stashing for the First $50
The first steps you should take as an investor are directly towards your bank and/or credit union. Stash that cash in a savings account (the chapter recommends online savings and mentions ING Direct, which I personally use and love) that earns a decent interest rate. Better yet, if you’re showing a surplus of cash, you might want to set up an automatic savings plan so that your surplus is automatically moved into your savings account. If you’re not going to touch the money for a while and want to boost your return safely, certificates of deposit are a solid option.

Another option is savings bonds, which really are only useful if you don’t want to touch the money (or want to gift it to someone else) and the rates are solid. Look at what you can get with a savings bond and compare that to the interest rate in your savings account – and go for the higher one.

Part Two: The First $500
After a while, your cash builds up and some more doors open to you. When you reach the $500 threshold, here are some things to consider:

Interest checking accounts If you have $500, which is often a threshold for opening an interest checking account, now would be a good time to open one. Just keep that $500 in the account and use it to maintain that minimum balance. Obviously, different banks have different minimum balances for an interest-bearing checking account – I currently use ING’s Electric Orange, which has no minimum and earns about 3%, but doesn’t give you paper checks. The point is, if you have cash, use it to leverage yourself into a checking account that earns you some money automatically.

Money market accounts Keep a strong eye on the yields for these, and use these for savings if they’re looking better than your savings account. Right now, money market accounts look pretty good, as they’re earning around 5%, so it might be worthwhile to put savings into one of these if you meet the minimum amounts required. Check around and see what’s available.

Mini-investor programs, like DRiPs If you want to get started in stock investing, one excellent way to go is with a DRiP (dividend reinvestment program). Some companies allow you to buy stock directly from them and then automatically reinvest the dividends that are earned from the stock. The book explains exactly how to get started, and lists a bunch of companies to get started with – I’ll admit that a DRiP with Home Depot is fairly tempting to me.

Investing clubs Another option is to find an investing club in your area and join. Such clubs usually charge an annual membership fee, then use most of that fee to invest. Often, the club issues “shares” based on the number of years you’ve been a member, and then when you leave the club, you can cash in your shares. They meet about investing decisions and often have presentations on various topics, providing a great place to learn about investing options.

Part Three: The First $1,000
When your bankroll gets up to $1,000, more options open up for you:

IRAs Many IRAs have a minimum contribution of $1,000 to open up, so when you reach that threshold, you may want to consider opening one. The best option for most beginning investors is the Roth IRA, which allows you to take out the money you contributed at any time (but you can’t put it back) and the growth in the investment can be taken out tax free when you reach age 59 1/2.

401(k)s If you are really building up a surplus, you should consider putting that money each paycheck into a 401(k) plan to help build for retirement. These plans often come with an employer match, which means if you contribute a certain amount to your plan each week, the employer will match it. If you find yourself building money between paychecks instead of losing money, this is a great place to put it so that you’re covered over the long haul.

Treasury notes You can also invest directly with the federal government in treasury notes via Treasury Direct. These are incredibly safe investments that will pay out money gradually over time – if you want to put your money someplace incredibly safe, this is perhaps the best bet available to you. The returns aren’t magnificent, but the returns are pretty much as guaranteed as can be. I know people who invest solely in these and live off of the income they generate.

Part Four: The First $2,000
Even more options appear when you start building up multiple Ks, but most of them revolve around stocks.

One option is to open up a brokerage account and directly buy individual stocks. While this is fine if you intend to just buy a lot of shares of one company and hold onto them, it’s perhaps not the best move for people who aren’t familiar with the vagaries of individual stock investing.

A much better option is mutual funds, particularly low-cost funds. These are discussed extensively in this part of the book and the author points out several solid places to buy them, including my personal favorite option, directly through Vanguard.

If you’ve got a couple thousand saved up and are looking to dabble in stocks, this is a great section to read.

Part Five: When You Have $5,000
At this threshold, options really begin to open up. This section discusses two real options.

Bonds Bonds tend to be good, secure investments for people with high earnings. Some bonds (municipals) return money tax-free, for example, and others are incredibly stable. Usually, bonds are rather safe places to put money, but you should check into them first by finding out their bond rating.

Stock portfolios Stock portfolios are very attractive to people who are willing to invest in a more risky fashion. In essence, you’re buying a collection of stocks, hoping that at least some really take off and that at least a few do a good job of staying strong when other stocks are down, so you don’t lose much money overall when the market goes down. There’s an excellent thirty page explanation of how to build a stock portfolio in this section, perfect for people who may be interested but don’t want to tackle a large book on the topic.

Part Six: Over the Top
Once your money really begins to take off, more and more investment options open up, and some are dealt with here in brief.

Real estate You can start off by investing in an REIT (real estate investment trust), which basically means you’re investing in real estate with a group of other people so that you all benefit from the profits. If you have a lot of money, you can start buying homes and renting them out to people to earn money.

Foreign stocks and bonds You also may start investing in stocks and bonds held in other countries. Generally, these tend to be more speculative than domestic stocks, perfect if you’re willing to forego the risk of some serious losses to nail some strong gains.

Windfalls The section also offers some advice on how to handle a windfall. For most people, I think the advice is spot-on – do nothing at first, think carefully about your long-term goals, and hire a professional if it isn’t obvious what to do with it (if you get $100,000 and have more than that in debt, it’s pretty obvious what to do with it).

Appendices and Supplements
The book also has a number of interesting appendices and supplements, from a personal finance calendar for a year (reminding you when to do certain tasks, like filing your taxes and so on) to some basic frugality advice and tips on avoiding scams. The one that stood out to me was the “Wall Street Jargon Made Simple” section, which taught me a thing or two and would have been extremely helpful a year and a half ago.

Buy or Don’t Buy?

If you’re a new investor with a small bankroll and are looking for very specific instructions on how to get started with investing, buy this book. It does a splendid job of explaining the basics of many different investment opportunities and explains in detail how to get started with each one. Outside of that audience – namely, people trying to escape debt and people who have significant assets to invest – this book won’t have nearly as much compelling information.

For me, personally, I would have greatly enjoyed this book a year and a half ago when I was first learning about the investment opportunities available to a small-scale investor. At this point, though, I have a fairly well thought out investment and debt elimination plan that I’m following, and this book wasn’t particularly helpful to me.

This is a spectacular book for the beginning investor – but others may find that their time is better spent reading other books.

How to Invest $50-$5,000 is the fifty-second (and last) of fifty-two books in The Simple Dollar’s series 52 Personal Finance Books in 52 Weeks.

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  1. Definitely. At the very least, money should never be sitting idly in a checking account earning less than 1% interest. Due to transactions costs, I don’t think it’s really practical to think about non-retirement investment in the stock market until you’ve saved up at least $2500. Anything less would be better served accruing interesting in a 5% or so savings account. Regular 401k+Roth contributions should always be a top automated priority.
    -R

  2. mgroves says:

    REITs sound very interesting…have you thought about doing a blog post on that?

  3. Mrs. Micah says:

    Looks like exactly what I could use, though your outline might be just as useful as the book itself. Perhaps there’s a copy I can skim through tonight at Borders. :)

  4. I’d like to put some savings in a money market account, but my preferred company (Vanguard) has a $3k minimum… does anyone have any recommendations for solid money market accounts that have a minimum of $1k or even $500?

  5. Jeff says:

    “Due to transactions costs, I don’t think it’s really practical to think about non-retirement investment in the stock market until you’ve saved up at least $2500.”

    One thing you (and this book) are leaving out are ETFs. You can buy a share of a broad index for as little as about $50, and if you use an online broker like Zecco, there’s no cost for the transaction.

    Obviously, you shouldn’t put the $50 in stocks/funds for a short-term investment, but it could make sense as a small start towards retirement.

  6. Writers Coin says:

    If you have $5,000 buy a share of Berkshire B Stock and put the rest in an ING Savings account. Can’t go wrong there.

  7. Peter says:

    I recently checked this book out of the library, and really wish I’d seen it ten years ago. Lots of solid advice to get started with offered in a reasonable (if occasionally dry) manner.

  8. 60 in 3 - Fitness and Health says:

    My only problem with books like this is that your outline pretty much says it all. Oh they’ll include more info and some happy stories about people who’ve used this strategy successfully, but ultimately, they have about 4 pages worth of useful stuff.

    Gal

  9. Laura says:

    We had a money manager speak to us this morning in my Family Financial Management course, and I wish he had just passed out copies of this book instead of lecturing. For an audience of 18-22 year olds from diverse majors he proceeded to discuss complex investment strategies for persons with a MINIMUM of $200,000 to invest, with his main case study being the Yale Endowment Fund. It was only with direct questions that I managed to get him to provide any useful information for the beginning investor, and even that was quite sparse. I also asked about your favorite- index funds- which he admitted were “the greatest thing since sliced bread,” although I’m pretty sure it was sarcasm. I think his job gets eliminated by them. But thank you for this post, as it answers many of the relevant questions that my collegiate level personal finance course fails to address!

  10. Elizabeth says:

    Thanks for the great review, Trent! I’ve just requested the book through my library system and am now on my way to check out your other book reviews.

  11. Keiichi says:

    Awesome review? I’m at the point in my life where I need such tips on what to do with my money. I’ll definitely have to check out this book! Thanks!

  12. Appfunds says:

    I bought some silver coins recently.
    Their prices went up so fast that they covered my stock market losses .
    You can buy a single silver coin starting from around $1 I guess.

    Collections and antiques are really good investment even if you have a limited budget.

  13. Havana says:

    This post helped me so much in getting an idea on what to do with my money. :D I will definitely check the book out! Thanks!

  14. Dan Sebring says:

    As a real estate investor in income properties, I wanted to start placing a portion of income in another market to prepare for retirement years. After some research, came up with ING Annuities, and opened an account for $5000 with a minimum 7% interest with a quartery ratchet. As funds are added, the moneypile will grow quickly!

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