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Whether your student loans are forgiven, you received a gift or earned some extra money this month, using $100 or less to start your investing journey is more possible than ever.
With investment products like fractional stocks and exchange-traded funds, or ETFs, you can get into the market for dollars and cents — and quickly build a diversified portfolio with little money. Not to mention apps that can help you save or invest spare change.
So if that extra Benjamin lands in your lap, here’s what you need to know about how to start investing, which financial products can help you diversify your portfolio for less, and how to make your money work for you.
What to consider before you start
Before you start investing, make sure you’ve met more immediate financial needs, like paying off high-interest debt and building up an emergency or rainy day fund, says Jen Hemphill, Certified Financial Advisor in Fairfax, Virginia.
If you have this coverage, it can be nerve-wracking to consider starting to put money into an investment account instead of your savings account. One strategy for overcoming investment fears is to focus on your goals, according to Hemphill, who also works with clients and provides free bilingual financial education on his “Her Dinero Matters” podcast.
Also see: No matter your age, here’s how to know if your finances are on track
Hemphill suggests that you first consider why you are investing. Whether your reason is college, a home, retirement, a medical procedure, travel, or something else, the reason you want to invest affects the type of financial product that best suits your timeline and goals.
The reason you want to invest also indicates the level of risk you are willing to take. Investments always involve risk, says Hemphill. It’s normal for markets to go up and down, and you need to understand this before you start investing. If you need money for something in the next five years, say, a high-yield savings account might be a better option because even though your money has less growth potential, it has less risks.
But if you have a very long investment horizon, you might take more risk, thinking that it will eventually pay off.
“When the market is down,” says Hemphill, “you have to be able to keep going.”
Although the stock market can be risky, the benefits of investing can make you think twice about keeping all your money in cash or in a savings account.
How to start investing with little money
Some beginners may feel confused or stuck on what exactly to invest and how.
“The hardest part for beginners is to start putting money into the account and hitting buy,” says Maggie Gomez, a certified financial planner based in Orlando, Florida. Gomez’s experience with financial insecurity and homelessness early in his life informed his approach to making financial education and services accessible to a more diverse range of people.
If you share this uncertainty about how to get started, here are four ways to start investing.
1. Retirement plans for retirement goals
If your investment goal is retirement, you might already be invested if you participate in an employer-sponsored 401(k) plan.
If you’re not and want to start saving for retirement, you can create a tax-efficient plan yourself with an Individual Retirement Account, or IRA. Since some providers require minimum accounts for IRAs, be sure to look for a provider with a low or $0 minimum.
Roth IRAs are tax-efficient accounts for long-term investors who want to contribute in after-tax dollars and withdraw their investment tax-free in retirement. Traditional IRAs, on the other hand, allow you to invest pre-tax dollars. With this type of account, you pay income taxes when withdrawing money in retirement.
After: The best ways to save for retirement at any age
2. Low Cost Brokerage Accounts for Financial Purposes (Non-Retirement)
If you have a different investment objective, a brokerage account may be right for you. Brokerage accounts allow you to invest in things like stocks, ETFs, and index funds. They are easy to open and differ from retirement accounts in that you can sell at any time and withdraw your funds without penalty. However, note that you will likely have to pay capital gains taxes if you make money on your investments.
If you are opening a new account, be sure to look for a brokerage that offers commission-free trading, no account minimums, and no fees to open the account.
You can look for a brokerage that offers fractional shares, which allow you to buy portions of a single share of a company, rather than a whole share. So if you only have $20 to contribute to a stock priced at $50, fractional shares can get you there.
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3. Index funds and ETFs
Buying and selling individual stocks generally involves a high level of risk. Instead, you can invest in ETFs and index funds, which are baskets of investments that include tens, hundreds, or even thousands of stocks. These products can track various assets, such as stocks, bonds, currencies and commodities, or even an entire market.
Buying a share of an index fund or ETF gives you instant access to stocks from a wide range of companies, providing quick and easy portfolio diversification, making it a great choice for beginners. However, note that while index funds and ETFs are similar in many ways, they have their differences.
Once you’ve selected an account, decide if you want to invest all at once or over time. The $100 you have could be your first contribution, or you could divide it into smaller contributions such as $20 per month.
Spreading out your purchases over time like this is a financial strategy called cost averaging. Micro-investing apps also average cost by rounding up purchases to a debit card and investing small amounts in ETFs.
Learn more: I inherited the money. Should I invest everything at once? Or space it out? The highs and lows of the purchase average
4. Help from robo-advisors
A robo-advisor is an automated investment service that makes portfolio recommendations after assessing your risk tolerance, investment preferences, and time horizon through a questionnaire. Recommended portfolios are often made up of ETFs and range from more conservative to aggressive investment options. Once you choose a portfolio, the robo-advisor invests for you.
While some robo-advisors charge a portfolio management fee of around 0.25%, others charge no management fee. You will want to look for robo-advisors with low or no account minimums.
There are a lot of things to consider when starting your investing journey, but the important thing, says Hemphill, is to simply “start where you are.”
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Alieza Durana writes for NerdWallet. Email: adurana@nerdwallet.com.
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