19 May I want to invest but I don’t have much. Is there a minimum?
Q. What is the minimum amount you can invest? I have a limited income but I want to make money.
— Starting slowly
A. It’s great that you want to start investing. There are many ways to get started without a huge initial investment.
The minimum amount that you can invest has been falling over time, and you can find many investments that have no minimum, or minimums as little as $50 or $100, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
“There are several investment products such as exchange-traded funds that have no stated minimums, and you can purchase just one share of these funds,” he said. “Additionally, the transaction costs to purchase these investment products have been falling over time to as little as $0.”
Then there are fractional shares of stock, which would cost less than a full share.
Taking a step back, when you invest, compounding is what grows your money over time, Panambur said.
He said there are only three inputs to compounding: the money you invest, time and a rate of return.
You can control time and the money you invest, while the rate of return is unpredictable.
“Therefore, invest as much as you can, as early as you can. A good rule of thumb is to save and invest at least 10% of your income,” he said. “If you can save and invest more than that, then all the better.”
If you are only able to invest a small amount of money initially, then try to increase the amount over time, Panambur recommends. As an example, if you invest $2,500 the first year and then increase it by 3% every year and you earn a 6% rate of return per year, then over 30 years you will have over $275,000, he said.
You should also invest using a diversified approach for the long-term.
“Investing in a diversified portfolio over the long term increases the odds of investment success,” he said. “Resist the urge to speculate and make a quick buck because that could lead to permanent loss of capital, which hurts your long-term performance.”
If you can, use a retirement account, such as an IRA or a 401(k), so that your investment strategy is tax efficient, he said.
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This story was originally published on May 19, 2021.
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