If you want to get started investing but don’t have a ton of money to invest, don’t let that fact discourage you. While it’s true that you need at least a few thousand dollars to create a properly diversified portfolio of individual stocks, here are three ways you could start investing for your future today with just $500 or even less.
Warren Buffett’s favorite investment
It may surprise you, coming from one of the most highly regarded stock pickers of all time, that Warren Buffett believes that the best investment most Americans can make are low-cost index funds, and the exchange-traded fund (ETF) variety is a great way for investors without a ton of capital to get started. Buffett particularly loves S&P 500 index funds as a bet on American business, but there are low-cost ETFs available for all sorts of investment objectives and risk tolerances.
IMAGE SOURCE: GETTY IMAGES.
What’s more, you can typically avoid paying trading commissions on ETFs, either by investing directly through the ETF’s issuing company (like Vanguard) or by using a broker who offers commission-free ETFs. As a personal example, I invest through TD Ameritrade, and as of this writing, there are over 100 commission-free ETFs to choose from (enrollment is required).
As an example, let’s say that I want to invest in the Vanguard Mid-Cap Growth Index Fund ETF(NYSEMKT: VOT), my personal favorite mid-cap growth ETF, which trades for just under $119 per share as I write this and is on my broker’s commission-free list. I could take my $500, buy four shares of the fund for $476, and not pay a dime in commissions. As time goes on and I want to add more to my portfolio, all I need is enough money to buy a single share of this or another ETF.
Buy a mutual fund
Another option is to invest in a mutual fund. Many mutual funds have relatively high minimum investments, but there are plenty that don’t. A quick search on TD Ameritrade shows over 400 mutual funds with no transaction fees that have minimum initial investment requirements of $500 or less. American Funds and TIAA-CREF are good examples of companies with a lot of low-minimum mutual funds.
In addition, many mutual funds with larger minimum investment requirements will waive the minimum if you agree to make monthly investments. This not only allows you to get your money into a mutual fund you otherwise wouldn’t be allowed to invest in, but can automate the process of investing a little at a time, which can help your nest egg build faster. Artisan Partners is a company that has no minimum investment requirement if you agree to automatic investing, whereas their account minimum is usually $1,000 per fund.
Pay off high-interest credit card debt
This may not sound like an “investment,” but hear me out. American households have about $1 trillion of credit card debt, and the average credit card interest rate is about 15%. It is simply not a smart idea to invest your money while you have high-interest debt hanging over your head.
Think about it this way. Historically, the S&P 500 returns about 9%-10% per year, on average. So, if you invest your $500, you can reasonably expect it to earn you about $50 over the course of a year. Meanwhile, if you have $500 in credit card debt at 15%, it costs you $75 annually just to maintain the debt. So, even if your investment earns 10%, you’re still setting yourself up to lose$25.
This is a simplified example, but my point is that if you have high-interest credit card debt, that may be the best use of your extra cash until it’s under control.
Investing is great. Besides starting your own business, it is one of the best plans for growing your net worth and achieving financial freedom! But there are a few steps to take before you get started. If you don’t set yourself up for success by taking care of these items first, you’ll be setting yourself up for failure down the road.
Once you’ve checked off the items on this list and are ready to start investing, we recommend checking out Betterment. Betterment is a low-cost and easy-to-use investing platform. It’s great for beginner and seasoned investors alike. They make investing SUPER easy.
Here is what we recommend you take care of before you start investing…
1. Have A Fully-Funded Emergency Fund
First things first. Unexpected expenses WILL happen. No matter how good you are at planning and preparing, something will happen sooner or later that wasn’t on your personal spending radar. I don’t mean “NFL is starting soon so I need a new TV” – I mean more along the lines of “the water heater just gave out and we need to replace it ASAP”.
These expenses are generally not only unexpected, but they also are time-sensitive – they need to happen “now”. Without an adequate emergency fund in place many people will struggle to cover even a $400 non-budgeted expense.
Financial advisors, financial planners, and just about every financial expert, will recommend having an emergency funds between three and six months worth of living expenses. If you don’t have an emergency fund you should quickly put together a starter emergency fund of $1,000. Then work toward growing that account into being fully-funded with the target amount you decide. (Here is a post to help understand where you should be in the three-to-six-month timeframe.)
2. Know Your Cash Flow (Have A Budget)
When thinking about investing, you need to think long-term. “Investing” for the short-term isn’t really investing – it’s speculating, which is basically gambling. There are any number of uncontrollable factors that can cause investments to go up or down short term, so any money committed to investing shouldn’t be needed for at least five years.
Having a household budget allows you to understand exactly where all of your dollars are going each month. Hopefully you’ve trimmed expenses enough, and/or have good enough income, that each month you have significant “extra” cash flow after covering all of your expenses.
The first thing to do with this extra cash is to build up your emergency fund as mentioned above. After that you should consider if you will have any large expenses coming up in less than five years: Will a new car be needed? Is a child’s college approaching? Might a child get married in the next few years? If there are events like these coming up then start putting aside money for them now – money that probably shouldn’t be invested in the stock market because of the “short” timeline.
The Budget Will Help Determine What You Can Afford To Invest
After you’ve determined any large upcoming expenses, and set aside enough money to cover them, now you can look at your monthly cash flow and determine how much money you want to invest. A very popular and productive investing technique is dollar-cost-averaging (DCA), which means you would be investing the same amount of money every single month (regardless of what the stock market is doing).
If you plan to practice DCA investing, make sure you aren’t cutting your budget too thin. If you have exactly $700 each month “extra”, it might be a good idea to invest $500 rather than the full amount. Give yourself some wiggle room so you can be consistent every single month.
3. Pay Off Consumer Debt – Especially Credit Cards
The national average interest rate on credit card debt in early 2016 is just over 15%. Let that sink in for a moment.
Carrying high-interest consumer debt is one of the largest barriers for people who are trying to grow their wealth and achieve financial freedom. Paying off a debt is similar to getting an immediate known gain comparable to the rate paid.
If you have a $1,000 balance at 15% interest, you’ll pay $150 this year in interest payments. Paying that off to save the $150 is almost like getting a 15% investment return! If you want to get specific, the comparable gain is actually higher because it probably takes about $200 worth of income (pre-tax) to pay the $150 of interest.
There are never any “sure things” in investing, but paying off consumer debt is a “sure thing” because you know exactly how much you’ll save. Knock out these easy things before putting your first dollar into an investment account.
There are a lot of people who earn really high incomes yet spend almost every dollar they earn (sometimes even spending more than they earn). So income of course isn’t the best measure of financial success. But net worth – essentially the fiscal value of your household – is a great measurement. Go figure out what this is now, and also check it a couple of times per year. This is the number you need to start paying attention to when you are working toward building wealth.
We use Personal Capital – a free online tool – to calculate and track our net worth.
5. Clarify Your Goals And Priorities
Managing cash flow (budgeting) is all about balancing priorities – you’re taking limited resources and allocated them to the areas that are most important to you. This exercise is key for your overall financial planning too.
Before getting started on your investing, take a few moments to think about what is really important to you…
If you spend time thinking about it (and honestly many people haven’t) you likely have one big top priority. Some people can quickly tell you what their driving dream is, but many people need to spend some time on this. Understanding what is really important to you can have a huge impact on planning all parts of your life and the actions you take when presented with different options.
Here is an article with a couple specific questions to help walk you through the process of clarifying what is really important to you in life, and then what the goals and priorities need to be to align with that life-guiding vision. I highly recommend that everyone read that article. It isn’t too long but has been known to have profound impact on individual’s thinking about their life.
6. Make Sure You Understand Investing Basics
No one should invest in something they don’t understand. Along that same line of thinking, that means that you should have a basic understanding of general investing concepts. You should know what exactly is a stock, and what is a bond? You should understand the concept of diversification (don’t put all your eggs in one basket). Understand mutual funds, and ETFs, and the difference between them. Make sure you are comfortable with the idea of volatility (fluctuations) and your level of risk tolerance.
Jumping into investing with no idea of what you are doing is very dangerous. Even if you decide to use an investment advisor, you should make sure you understand what they are recommending for you. If something isn’t clear to you, just ask. A good financial advisor or planner is going to take the time to educate you to make sure you are comfortable with the suggestions.
7. Think Long term
Setting your goals with the right mindset is essential when starting investing. Planning for the long term will help you manage risk as well as teach you the ways of investing through trial and error. Seeing your portfolio grow and learning the game could help set you up for more riskier investments later on. remember to think long term. And focus on building something that lasts.
How To Get Started Investing
If you really don’t know anything about investing, definitely get educated. You don’t need a deep knowledge to get started, but you certainly should know the basics. Once you understand general principles, we recommend checking out Betterment.
Betterment is an excellent low-cost and easy-to-use investment option. Invest with them and they’ll diversify your money into a portfolio customized for you personally. It all happens automatically. You don’t have to research funds, or calculate percentages, or anything. The investment will go into low-cost funds, including US stocks, bonds, international stocks, etc. For more details check out our Betterment review.
I hope these tips help you get started and help to prepare you for your entry into the investing world.
I get asked a lot “Tai, what’s one of your biggest regrets?” Now, I don’t like having regrets, but I will say there have been plenty of opportunities that I may have missed. One opportunity I would’ve liked to gotten in on earlier is cryptocurrencies.
If you had invested $100 in Bitcoin in 2010, you could have made close to 75 million dollars off of that alone.
Cryptocurrencies and blockchain are an exciting new technology with a lot of potential, but before you start investing, you need to educate yourself. A lot of people have made a lot of money off of cryptocurrencies, but they didn’t just get lucky. The people who make a lot of profit from trading cryptocurrencies like Bitcoin and Ethereum and other Altcoins have spent a lot of time studying the patterns and learning the ins and outs of cryptocurrencies. The great thing is a lot of these people are willing to talk about their strategies and help others learn about cryptocurrencies.
Start Engine ICO 2.0 Spring Summit
If you’re like me and you can’t get enough cryptocurrency knowledge, I’m going to be keynoting the Start Engine ICO 2.0 Spring Summit in Santa Monica (Friday, April 20). I hope to see you there. It’s going to be a great lineup of big hitters, including:
Patrick Byrne (Founder & CEO of tZero & Overstock.com) Gil Penchina (Top Investor in Ripple, Filecoin, PayPal, Polychain and #1 Investor on Angel List) Mark Suster (Managing Partner at Upfront Ventures, former VP Product Managment at Salesforce.com) Lou Kerner (Partner at CryptoOracle.io)
In addition to hearing from ICOs who are disrupting the largest industries, you will also have the opportunity to:
Network with top investors, advisors, and founders over an entire day, with catered breakfast and lunch that culminate in a legendary cocktail party by the ocean.
Learn actionable insights and how to leverage and market an ICO for your business
The Summit content will be curated to include the latest insights, trends, and forecasts which will empower you to stay ahead of the market by learning from experts.
Today I want to give you a few tips and tricks that I’ve learned from the pros, so you can figure out how to make money off of trading cryptocurrencies.
I wanna start out with talking about cryptocurrency ICO’s. ICO stands for initial coin offerings, which is when a new cryptocurrency is released and a certain amount of the coin can be purchased. A lot of people can do well investing in an altcoin at the ICO, but you really have to do your research because there’s a lot of people out there with scam coins. There are also a lot of people that spend a lot of time on their computers researching the technologies and the teams behind different cryptocurrencies who put out their findings on forums and blogs so you can make good investments.
Another thing you need to think about is how you are going to store your wallet. Your wallet is like your safe code to accessing your cryptocurrencies. I would recommend storing your password in at least 2 locations. Having a hard copy in a safe deposit box is a great way to make sure your code is totally secure.
Right now is a great time to make money online, but you need to be careful in not putting all of your money into one thing. I mean, I never recommend that people put all of their money into one investment. You should be able to lose one investment completely and still feel financially secure. The only thing you should ever invest everything you have into is yourself.
Like I said, crypto is a great way to make money, and even though it would have been better if you started investing 5 years, there will never be a better time than right now. Before you start throwing your money into cryptocurrencies, take the time to learn from other successful traders so you can learn from their mistakes and win off of their successes.
Cryptocurrencies could be the biggest thing in the next couple decades, and there is still a lot of hesitation about it.
What do you think about cryptocurrencies? Have you invested any time or money into Bitcoin and other altcoins?
Remember, education is the most important key to success, so take the time to learn about crypto trading and blockchain.
P.S. I wanted to take a quick second to congratulate all of you who took advantage of my special scholarship offer over the last few days. I look forward to hearing your success stories. You’ve taken action and if you keep up the work you’ll see great improvements in your life!
Unfortunately, if you weren’t able to get in, the offer expired now. I’ll be doing some other bad ass stuff soon though, keep an eye on your email!
If you’re going to be in the LA area Friday April 20th, don’t forget to get your discounted ticket to the Start Engine ICO 2.0 Spring Summit in Santa Monica. Come hear me and some of the biggest names speak about all the latest cryptocurrency insights, trends and forecasts. Is bitcoin going to recover? Come hear what the big names have to say.
Wealth creation has often been the last thing on the mind of the common worker. After all, how can you think of building wealth when you’ve got so many bills to pay? If we take a look at who generally holds the wealth in in america, it would look something like this:
America=Overall wealth basket of 100 percent.
The top 1 percent , also known as the rich or the wealthy, own and control = 90 percent of America’s wealth.
Everyone else own and control= 10 percent of America’s wealth.
Now why is this? Is it because of the government? Is it because of capitalism? It would seem like an unbalanced number considering that the middle class is the engine of the American economy. Not to be overly simplistic, but one of the more common reasons would be the mindset held by those middle class.
During our younger days we are taught to work hard, go to school, and find a safe and secure job. But we’re not taught the ways of money and the logical ways of building wealth. We’re basically taught to climb the corporate ladder if we want to get ahead.
This however, is a mindset that worked very well in the industrial age. But that age has long gone away. And we are now in what is called the information age. We live in time where the opportunity to build wealth is greater than ever before in history.
Building Wealth Starts With Paying yourself before you pay anyone else
Now what does “paying yourself mean, anyways?
I’m gonna play with your brain just a little to give you an idea of how this works.
Most people take a day out of the week to do their bills. Or to do the family home budget. An important discipline all of us should have, really. We allocate money for the light bill, we put money aside for the cable bill. We’re making sure the cell phone bill is taken care of. We budget for our taxes.
Am I missing anything? O yea, we’ve gotta budget for the car note and mortgage payments.
And before you know it that big piece of pie or take home pay is stretched to the limits. But is there anything we’ve missed budgeting for?
Of coarse! How about paying yourself? That would be putting money aside for savings, investments, and financial education, which could include books or courses that teach you the ways of money. But here’s whats gonna really blow your mind. You’re supposed to put that money aside for you, first! Before any of the bills. Sounds a bit counter intuitive I know. But it is the way to building wealth believe it or not.
Make paying yourself a part of the family budget
Paying yourself first should be added into your monthly budget and you should live on whatever is left. Does this sound strange? Does it sound like something that probably only 1 percent of people in America would even consider? That’s why that same 1 percent control 90 percent of all the money in America! They pay themselves first. No one, not a bank, not a credit card company, and not even the government, should come before building a strong nest egg for you and your family, period.
I can recall having a conversation with a friend of mine about the idea of paying yourself first. He thought I was crazy for even suggesting to him this idea. His problem with this idea would go something like this:
If I paid 10 percent of my earnings to me first, then how will I have money to cover all of my bills? This is an honest question, really. And I certainly felt where he was coming from. My answer is this:
You have to convert your way of thinking while reorganize your priorities. Here is the order in which your income should be allocated. We call this the 20 – 30 – 50 rule for budgeting. We believe that following this rule will set you on the way to your financial goals and put you on the road to financial freedom. The rule converts the old way of thinking about money to a new and improved wealth building concept of money.
So, here’s the breakdown of the 20-30-50 rule of budgeting.
50 percent of your income should go towards the things you need to survive. This will include you mortgage, car note, home utilities like lights, gas, water, and home phone, e.t.c. It does not include your cell phone bill or cable as we believe these to go into the category of wants. However, if your cell phone is mainly used for business, then that may be included in this category.
30 percent should go towards your wants. This includes all forms of entertainment and things like dining out.
Lastly, 20 percent should go towards all of your financial goals. This will include savings, investing, paying off any debt you may have.
Notice we didn’t give you any specifics on how to invest or where to put your money. This is because wealth creation starts at home. It starts with the first fruits of your income. It also comes from changing the way you think about money.
If you could follow this rule you will find yourself in the “Law of Accumulation”. You’ll watch as your savings and investments continue to grow and grow over time! And by investing in your financial education, you’ll learn all that you need to about investing.