How to Invest Small Amounts of Money Wisely

Steps

1. Pay off any high interest debt and build up an emergency fund first. See How to Decide Whether to Invest or Pay off Debt.
2. Promise yourself that you'll keep your costs of investing (fees, commissions) to less than 2% of the transaction value, no matter how much you're investing. Multiply the amount you have to invest by .02. If the trading cost is more than that, put your money in a savings account instead until you can find an investing opportunity with a better ratio.<ref name="fool2" />
3. Choose one of the investing options below.
4. Keep track of your investments for tax purposes.

1. Invest directly with Dividend Reinvestment Plans (DRPs) and Direct Stock Purchase Plans (DSPs). With these, you don't have to deal with brokers (or pay their commissions) because you buy stock straight from the company.
   • Not all companies do this, but you still have over 1,000 to choose from.<ref name="fool1">http://www.fool.com/investing/brokerage/how-to-invest-20-100-and-1000-and-more.aspx</ref> You'll have to search for the companies that offer a direct purchase program, but you can find a partial list here.
   • In most cases, you can make an individual purchase or set up an automatic payment plan.
   • There may be a nominal commission or a minimum purchase requirement.
   • The main difference between DRIPs and DSPs is that to participate in DRIPs, you must already own at least one share of the company's stock. You then collect your dividends in the form of additional shares instead of cash.<ref name="msn">http://articles.moneycentral.msn.com/Investing/SimpleStrategies/InvestOneDripAtaTime.aspx</ref>
2. If the company you want to invest in doesn't have a Drip plan, look for a broker that lets you set up Drip-like accounts with which you can buy shares of stocks with low transaction costs. Just check the following:<ref name="fool2">http://www.fool.com/investing/brokerage/what-if-i-can-only-invest-a-little-every-month.aspx

1. • Does it have a monthly minimum?
   • Does it have a higher charge to sell a stock? That might be an issue if you're an active trader.
2. Look for mutual funds with a small buy-in. There are a few mutual fund companies that will allow small investors to buy in, but you'll have to agree to an automatic investment plan, whereby you let them deduct a fixed amount from your bank account every month (usually at least $25). This is usually in addition to a minimum initial investment (starting at $25).<ref name="msn2">http://articles.moneycentral.msn.com/Investing/SimpleStrategies/HowToInvestWhenYoureBroke.aspx</ref> See How to Select a Mutual Fund.

1. Invest in an index fund, which tracks the S&P 500. Traditionally, they've returned about 10% a year.<ref name="fool1" /> Once you make your first payment, you can add as much money as you want and as often as is convenient for you without any additional costs or commissions. Since you deal directly with mutual fund companies, you don't have to pay a broker a commission.
   • The minimum varies, but with an IRA you can invest as little as $250. (See How to Open a Roth IRA Account.)
   • If you have $500, you can be a little pickier. Look for an index fund with a low expense ratio.
2. Consider opening a discount brokerage account. A discount broker doesn't offer all of the services of a full-service broker, but they still allow you to purchase individual companies. Some accounts require a minimum initial deposit.

1. Follow the steps in the previous section, unless you're confident you can save $1000+ a year annually, in which case you should consider a retirement account.

Tips

• Keep in mind that this is money for investing, and nothing else, so you need to realize that it won't be readily accessible (that's what your emergency fund is for) and that there's a chance you will lose it (so if losing that money will somehow ruin your life, don't invest it).

Sources and Citations

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