How Much Money Do I Need to Start Investing?

How to manage your investments

You’ve established a brokerage or advisor account, so now’s the time to watch your portfolio. That’s easy if you’re using a human advisor or robo-advisor. Your advisor will do all the heavy work, managing your portfolio for the long term and keeping you to the plan.

If you’re managing your own portfolio, you’ll have to make the trading decisions. Is it time to sell a stock or fund? Was your investment’s last quarter a signal to sell or buy more? If the market dips, are you buying more or selling? These are tough decisions for investors, both new and old.

If you’re investing actively, you’ll need to stay on top of the news to make the best decisions.

More passive investors will have fewer decisions to make, however. With their long-term focus, they’re often buying on a fixed regular schedule and not worrying much about short-term moves.

2. You end each month with extra money

Your emergency fund is looking good. You pay all the bills and any high-interest debt. You have enough to cover your expenses. Still some left over? It doesn’t have to be a lot. Investing is all about starting small and growing those dollars over time (more on that below). The key is to stick with it so the money invested can work for you.

Having trouble balancing your budget? Read “3 steps to allocate a paycheck when you want to get ahead with your money.”

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How much money do you need to invest?

If you don’t have a lot of money to invest you may be wondering how much you should invest a month in order to build a sizeable pot in the future. In the below table, we share examples of how regularly investing even small monthly amounts can still help build significant sums over the long term. The examples show how much even small monthly amounts can grow to with a 5% annual rate of return over a period of 5 or 10 years. A 5% annual rate of return is the average rate of return for investing in shares over the long term in excess of inflation according to the Barclays Equity Gilt Study. The sums shown are after investment fees but remember investments can go down as well as up.

Investing value after 5 and 10 years

Monthly Amount Investment value after 5 years*  Investment value after 10 years*
£10 £680 £1,553
£25 £1,700 £3,883
£50 £3,400 £7,764
£100 £6,801 £15,528
£250 £17,002 £38,821

*5% annual rate of return over 5 and 10 years minus fees 

Start with your 401(k) at work

The best place to start investing for most people is an employer-sponsored 401(k). Depending on where you work, it could come in the form of a 403(b) or 457 plan, but they all work in essentially the same way for employees.

With this type of account, you can have a portion of your paycheck automatically withheld and invested for retirement with a tax advantage. There is no minimum savings rule to get started here.

Many employers will match your contribution, or a portion of your contribution, up to a certain limit in a 401(k) account. As a general rule, you should always take 100% advantage of this match. It’s like free money on top of your paycheck. Don’t leave those dollars behind.

Is it really worth investing such a small amount?

It may be small, but it is mighty. Given time, the little amounts you’re able to squirrel away in an investment account can grow into an impressive sum. (That’s why Acorns lets you start investing with just $5.)

Just look at the math: Let’s say you set aside $100 today, plus another $100 every month, at an interest rate of 1 percent compounded monthly, which is about what you can expect from a savings account these days (though with rates rising over the past couple of years, you may be able to do better). After 40 years, you’d wind up with more than $59,000. Not bad.

Even better: At a rate of 7 percent, which is a realistic average rate of return with a well-diversified stock portfolio invested for the long term, you’ll have nearly $250,000 after 40 years. Sure, that may not be enough to retire on, but remember that’s based on setting aside less than $25 a week.

What are the advantages of dollar-cost averaging?

Not only does it allow you to start investing as soon as possible—rather than waiting until you’ve accumulated a big chunk of money to invest—it also helps ensure you’re buying more when prices are low and less when they’re high.

There’s also a psychological benefit: While the general direction of the markets is up over long periods, you can expect plenty of downs along the way. And that natural volatility inherent in investing can be a lot for anyone to stomach. Dollar-cost averaging can help calm any investing anxiety you may have because it forces you to follow a routine and roll with whatever market movements come each day. And while you may miss out on time in the market, you can benefit by scooping up more shares during the dips. Just be sure that you set up automatic contributions, so you’re not tempted to spend it instead.

Then try increasing the amount you save each month. Some retirement accounts may even offer an auto-escalation option, which would automatically increase your contributions. And whenever you get a raise, boost your monthly savings proportionately. Before you know it, those small boosts will add up to big savings, and you’ll reach that attractive model size of 20 percent a month—or even more.

When to start investing

While the goal is to start investing immediately, you should tackle the following two financial issues first:

  1. Pay off high-interest debt. Do you have any high-interest debt? You should aggressively try to make payments on this to bring the balance down — because the interest you’ll pay will negate any gains you make on your investments.
  2. Build an emergency fund. Work on an emergency fund so that you have three months or more of living expenses saved up. You need to ensure you could survive financially if you lost your job or if an unexpected issue were to occur.

As soon as you make progress on your high-interest debt and start building your emergency fund, only then should you begin to invest your money.

Read more: How to get out of debt on a low income

Mistakes to avoid when investing with little money

When some people first get into investing, they just want to get rich quick. I can relate because I read books and blogs about that very topic when I was a new investor. I wanted to find the secret sauce. But after wasting six months on various get-rich-quick schemes, I accepted that I just needed to focus on investing my money the right way.

There are plenty of investing mistakes that rookies typically make — mistakes that could cost you thousands of dollars and discourage you from investing in the future. We want you to avoid these mistakes.

So, what are they?

  • Not investing at all. The worst thing that you could do is put off investing. That’s because you want time to be on your side when it comes to compound interest.
  • Trying to time the market. They say that time in the market is more important than timing the market. As tempting as it is to buy the dip, you have to remember that nobody can accurately predict the market.
  • Getting involved in shady investments. As tempting as it is to go after those promises of high returns with low risks, you have to watch out who you trust your money with.
  • Putting all your eggs in one basket. It’s crucial that you diversify your investments so that you don’t end up hoping for one investment to pay off.
  • Panicking at the first sight of volatility. You have to understand that ups and downs in the market are normal. When the market drops, it’s important that you walk away from your portfolio so that you don’t end up selling at the bottom.
  • Selling when an investment drops. You don’t lose money until you sell. Too many rookie investors will start selling off their assets when they begin to drop. You have to be patient and expect short-term fluctuations.
  • Taking advice from random strangers. There’s an abundance of self-proclaimed gurus out there who want to give you unsolicited stock picks. You should avoid these people at all costs.
  • Not understanding what you’re investing in. Before proceeding with an investment strategy, you have to know exactly what you’re putting your money into.

At the end of the day, you want to start investing the right way (and right away) so that your money can begin to work for you now.

Things to consider before investing

When you are planning to start investing it would be a good idea to consider the following:

Have you cleared your short term debt?

Short term debt, such as credit cards, will incur a high-interest rate and so it would be wise to pay off, or certainly reduce this debt before starting to invest. In our article, we share ‘4 easy ways to clear your credit card debt‘.

Have you built an emergency fund?

You should plan to have an emergency fund of 3 to 6 months net pay put aside to cover any emergency expenditure so that you do not end up having to cash in your investments and lose money. For more information on how to start building an emergency fund, read our article ‘Building an Emergency Fund – the what, why & how‘.

How much do you have to invest?

Aiming too high will only mean you are less likely ‘to stick with it’ if your finances come under pressure. Start off with a manageable amount and build on it as you move forward.

Have you set investment goals?

If you have an investment goal, such as retirement, then you are more likely to continue building your investments over the long term. Read our article ‘How to set investment goals and timeframes‘ for tips on setting investment goals.

Check the fees

If you’re only investing small amounts you will need to check the fees with the investing platform you choose. Choosing a provider with high fees could eat into your investment and impact the return you see on your money. Look at our best buy tables to find out the best providers with low investment costs.

Consistency is Key

When you first start investing, especially if you only have a small amount of money to work with, it’s easy to feel that it’s not enough money to make a difference. But just being consistent and building that important habit of investing is life-changing.

Experts also agree that setting up monthly automatic payments to your retirement accounts or taxable brokerage accounts helps tremendously. When you set up an automatic transfer to your investment account each month, you don’t have to think about it. Since you aren’t manually making the deposit each month, you don’t feel as if you’re giving anything up.

Don’t forget to keep checking your investments. Make sure that your money is being invested, and is not just sitting there, and make phone calls to your providers and ask questions. Many companies have a 24/7 customer service line that you can call and check in on  your money.

Diversify and Reduce Risks

Diversification is considered to be the only free lunch in investing. In a nutshell, by investing in a range of assets, you reduce the risk of one investment’s performance severely hurting the return of your overall investment. You could think of it as financial jargon for “Don’t put all of your eggs in one basket.”

In terms of diversification, the greatest difficulty in doing this will come from investments in stocks. As mentioned earlier, the costs of investing in a large number of stocks could be detrimental to the portfolio. With a $1,000 deposit, it is nearly impossible to have a well-diversified portfolio, so be aware that you may need to invest in one or two companies (at the most) in the first place. This will increase your risk.

This is where the major benefit of mutual funds or ETFs comes into focus. Both types of securities tend to have a large number of stocks and other investments within their funds, which makes them more diversified than a single stock.

Can you start investing with $500?

The short answer is yes. Once you’ve tackled the items above and you’re ready to start investing, there’s no magic amount of cash you need to get started beyond the account minimum of any investing service you plan to use. At Wealthfront, you can get started with a diversified and automated portfolio of low-cost index funds with as little as $500. If you’re a new investor, we think you should get started as soon as you have $500 saved up beyond the goals outlined in this post.

Some people might feel tempted to save up a larger amount of money and invest it all at once, but there’s really no benefit to doing this. When it comes to investing, time is on your side – and the sooner you can get in the market, the better. More time in the market gives your returns more time to compound, and it also decreases your probability of loss. The key is to start investing early and keep putting money in, no matter what the market is doing. If you do this, you’ll be well on your way to building long-term wealth. 

Bottom line

The great thing about investing these days is that you have so many ways to do it on your own terms, even if you don’t know much at the start. You have the option to do it yourself or have an expert do it for you. You can invest in stocks or stock funds, trade actively or invest passively. Whichever way you choose, pick the investing style that works for you and build your wealth.

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