As a young millennial just stepping into the workforce, you may have heard about the benefits of investing but might not know where to begin, especially when you only have a small capital to work with.
In this article,I hope to provide you with practical tips and guidance on how to start investing with little money. By the end of this article, you should have a clear idea of how to take your first steps towards building your wealth through investment. Let’s get started!
Why you should be investing
Alvin shared why you can’t afford not to invest previously. But in a nutshell, investing is one of the most effective ways to build wealth over time. Instead of letting your money sit in a savings account doing nothing, investing allows you to put your money to work.
By investing wisely, you can earn a return on your investment that is higher than the rate of inflation, which means that your money will retain its purchasing power over time. By investing consistently over the long term, you can benefit from the power of compounding, allowing your investment returns to grow exponentially over time.
In short, investing can be a powerful tool to help you build wealth, achieve your financial goals, and secure your financial future.
How to Start Investing with Little Money?
Here’re 5 ways you can start investing with little money today:
1. Use a Regular Savings Plan (RSP)
Regular savings plans allow you to make regular contributions to an investment account on a scheduled basis. RSPs are designed to help individuals build wealth gradually over time by investing small amounts of money on a consistent basis, rather than trying to save up a large sum of money to invest all at once.
RSPs are often offered by banks, financial institutions, and investment companies, and can be used to invest in a variety of financial products, such as mutual funds, exchange-traded funds (ETFs), or individual stocks.
By investing regularly, you can benefit from the power of compounding and dollar-cost averaging, which can help you build wealth over the long term while reducing the impact of short-term market fluctuations.
Additionally, RSPs can be a convenient and accessible way to start investing, as they often require lower minimum investment amounts and can be set up easily online or through a financial advisor.
If you are looking for a way to start investing with little money on a regular basis, RSPs are a great way to start as they are mostly automated. You just need to make sure you have sufficient funds in your account each month.
2. Invest in a market ETF
Exchange-traded funds (ETFs) are a popular investment option for those starting with little money as they are relatively low-cost, diversified, and provide exposure to a broad range of securities.
A market ETF tracks a market index, such as the S&P 500 and offers investors exposure to a broad range of stocks in that index. By investing in a market ETF, you can benefit from the potential returns of a diversified portfolio while minimizing your risk.
Market ETFs are also a common option in RSPs. It is one of the best ways for beginners to start investing for market returns. Have that going for you while you learn more about the art of investing and picking stocks that can outperform the market.
3. Use a robo-advisor
A robo-advisor is a type of automated investment platform that uses algorithms and computer models to manage your investment portfolio.
Robo-advisors often require lower minimum investment amounts and charge lower fees compared to traditional investment advisors, making them a great option for those starting with little money.
Also, robo-advisors typically offer a range of investment portfolios tailored to different risk levels and investment objectives, and they can rebalance your portfolio automatically to ensure that it remains aligned with your investment goals.
Micro investing platforms like Acorns are robo advisors that can help you save and invest with little money at the same time.
4. Take advantage of Fractional shares investing
Fractional shares allow you to purchase a portion of a stock, rather than the full share. This way, you can invest in high-priced stocks without having to buy a whole share.
Fractional shares are now commonly offered by brokerage firms. Investing in fractional shares can help you diversify your portfolio and gain access to a range of stocks, even on a small capital.
Most brokers that offer fractional shares also offer low cost commissions. However, you should double check the cost of the transaction to make sure that your capital is not being eaten up by brokerage fees!
5. Use a high yield savings account
Although not an investment, using a high yield savings account allows you to grow your money at a higher interest rate. They can be a great way for you to park and accumulate your investment capital if you are still undecided on whether you should start investing, or if you foresee a need for cash in the near future.
6 Mistakes to avoid when you’re investing with little money
1. Failing to invest
It is easy to feel overwhelmed when investing, especially if you’re new. Hence, most people end up not doing anything.
However, failing to invest at all is one of the biggest mistakes you can make when investing with limited funds. Regardless of how much money you have, it’s crucial to begin investing as early as possible to capitalize on the power of compounding and increase your wealth over time.
Delaying your investment journey may cause you to miss out on potential returns, making it more challenging to achieve your financial objectives in the future.
2. Chasing high returns
It is natural to want to earn the highest possible returns on your investments. However, chasing high returns can be a mistake, especially for those investing with little money.
High returns often come with higher risks, and investing in high-risk assets can lead to significant losses if the market turns against you. Instead, focus on building a diversified portfolio that aligns with your risk tolerance and investment goals.
3. Trying to time the market
Many investors make the mistake of trying to buy or sell assets based on their predictions of where the market is headed. However, timing the market is extremely difficult and can lead to missed opportunities or significant losses.
Rather than trying to predict market movements, focus on investing consistently over the long term and staying disciplined in your investment strategy.
When you’re investing with little money, timing the market usually doesn’t pay as well as making sure your money spends time in the market.
4. Not understanding what you’re investing in
Investing in assets or financial products without fully comprehending them is another common mistake. Prior to investing, it’s critical to conduct thorough research and comprehend the risks and potential benefits of various investment opportunities. This can assist you in avoiding investments that don’t align with your investment objectives or that pose risks you’re not at ease with.
5. Selling when the market corrects
While it can be tempting to sell in a panic, selling during a downturn can lead to significant losses and can make it harder to recover when the market rebounds. Instead, focus on staying disciplined in your investment strategy and avoiding emotional decisions that can harm your long-term returns.
6. Not investing regularly
Finally, one of the biggest mistakes you can make when investing with little money is not investing regularly. Investing regularly, even if it’s just a small amount each month, can help you benefit from the power of compounding and can help you build wealth over time. Setting up an automated Regular Savings Plan can make it easy to invest regularly and stay on track with your financial goals.
Conclusion
Well, good news, investing with little money is totally doable! And it is also an excellent way to build your wealth over time.
However, before you jump into it, you should be clear about your financial goals. Some questions to start with include:
- why are you investing,
- how much can you afford to invest, and
- what are you comfortable investing in?
Remember, it’s crucial to avoid common investing mistakes such as not investing at all, chasing high returns, attempting to time the market, not understanding what you’re investing in, selling during market corrections, and not investing regularly. By avoiding these mistakes and staying disciplined in your investment strategy, you can increase your chances of success and achieve your financial goals over the long term.
