By Matthew Frankel (TMFMathGuy)
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.
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.