Making More Money by Investing
A common myth about investing is that a big fat bank account is required just to get started. In reality, the process of building a solid portfolio can begin with a few thousand—or even a few hundred—dollars.
Strategies to Start
Whether you’re planning to invest a little or a quite a lot, in safe bets or high-risk gambles, these steps should help get your plans off on the right track.
The diligence to dependably set aside a certain amount in savings every month will reap rewards in the long run. If you lack the willpower or organization to do that alone, technological help is available via various smartphone and computer applications.
The apps that make saving the least painless are those that simply round up your purchases and other transactions to the nearest dollar and put aside the “savings.” Acorns, Qapital, and Chime all round up transactions from your credit and/or debit cards and return the money to you in savings-friendly vehicles.
- Set aside a certain amount to save regularly.
- Look into savings apps that round up your purchases and save the small change.
- Pay off high-interest debts first.
- Take advantage of retirement plans.
- Think about the level of risk you are comfortable with and how that changes over time.
- Trade up to better choices as your investment pot grows.
Acorns puts the money into one of several low-cost ETF portfolios;1 these are good vehicles for small savers, as we cover below. Qapital adds the option to automatically transfer money, based on rules you choose, to an FDIC-insured partner bank account.2 Chime, which is an online bank as well as an app, offers a savings account that automatically sets aside a percentage of every paycheck you deposit, among other features.3
Short of using these apps, check with your bank about its own apps and other ways you might automatically transfer funds from non-savings accounts to those better suited to savings and investment.
Deal With Your Debts
Before you begin to save, analyze what it’s costing you to carry debts you already have and consider how rapidly you might discharge those. After all, high-interest credit cards can carry rates of 20% or more, and some student loans have interest rates over 10%. Those rates far eclipse the average annual earnings of 7% or so that the U.S. stock market has returned over time.
If you’re carrying a lot of high-interest debt, it makes more sense to pay off at least some of it before you make investments. While you can’t predict the exact return on most of your investments, you can be certain that retiring debt with a 20% interest rate one year early is as good as earning a 20% return on your money.
Consider Your Retirement
A key goal of saving and investing, even at an early age, should be to help ensure that you have enough money after you stop working. One priority in your planning should be to take full advantage of the inducements dangled by governments and employers to encourage retirement security. If your company offers a 401(k) retirement plan, don’t overlook it. That’s doubly the case if your company matches part or all of your contribution to the plan.
For example, if you have an income of $50,000 and contribute $3,000, or 6% of your income, to your 401(k) plan, your employer might match that by contributing an additional $3,000. A less generous employer might contribute up to only 3%, adding $1,500 to your $3,000 contribution. You’ll always want to invest enough to get the full amount of your employer’s match. Not to do so is essentially to throw money away.
401(k)s and some other retirement vehicles are also powerful investments because of their favorable tax treatment. Many allow you to contribute with pretax dollars, which reduces your tax burden in the year you contribute. With others, such as Roth 401(k)s and IRAs, you contribute with after-tax income but withdraw the funds without tax, which can reduce your tax hit on the year of withdrawal.4 And remember, if your money has grown for many years, there will be much more than you originally contributed, so those tax-free withdrawals will be worth it.
In both scenarios the earnings on what you invest accumulate tax free within the account. Even if your employer doesn’t offer any match on your 401(k) contributions, a plan is still a good deal..
Invest Your Tax Refund
If you find it hard to save money throughout the year, consider setting aside part or all of your tax refund as a way to get started with investing. It’s one of the few moments in the year where you’re likely to get a windfall that you weren’t already counting on.
No matter what kind of product you are investing in, it’s vital that you understand (and do your best to minimize) the fees associated with it.
Recommendations by Investment Amount
Before the specifics, a few general points are worth underlining. No matter your net worth, it’s important to minimize your investment fees, whether it’s on a checking account, a mutual fund, or any other financial product.
That’s especially the case when you’re investing on a budget, because fixed fees will take a bigger chunk of your savings. A $100 annual fee on a $1 million account is trivial, but a $100 fee on a $5,000 account is a hefty financial hit. If you’re investing on a budget, carefully choose the costs associated with where you put your money.
You’ll also need to weigh likely returns on your investments against the level of risk you’re comfortable with taking and that’s appropriate to your age. In general, your portfolio should become steadily less risky as you approach retirement.