A Simple Guide To Mutual Funds: Investing Your First $100

Investing small sums of money is a great way to build wealth over time. With just $100, you can start investing in mutual funds or exchange-traded funds (ETFs) and grow your money through compound interest. While there are risks involved, the potential rewards are significant, and it's a strategy that has proven successful for many long-term investors.

Mutual funds are an excellent option for beginners as they offer a diverse range of stocks with a defined risk profile. ETFs are similar but tend to match the market's performance more closely. Both are great ways to get started with a small amount of capital.

However, it's important to remember that investing always carries risk, and there are no guarantees. But with discipline and a long-term mindset, even a small investment of $100 can grow into a substantial sum over time.

Start with an emergency fund

Before you start investing, it's important to have an emergency fund to protect yourself against unexpected financial emergencies. These can include a car or home repair, a medical bill, or a loss of income. An emergency fund will help you recover quicker and get back on track towards reaching your savings goals.

The amount you need in an emergency fund depends on your situation. A good rule of thumb is to save enough to cover three to six months of expenses. This amount will vary depending on factors such as the number of dependents you have, whether you have a spouse with a job, or if you have wealthy parents you can ask for help. If you have one income, are self-employed, or have a family to support, you may want up to eight months' worth of savings in your emergency fund.

If you don't have a large sum of money to put aside, you can start small by setting up an automatic transfer of a smaller amount each month, such as $100, until you reach your target. It's also important to only use your emergency fund for true emergencies and to replenish it if you do need to use it.

When it comes to where to keep your emergency fund, consider a savings or money market account that is separate from your day-to-day cash. Look for an account that offers a small annual yield and has no annual fees. You want the money to be accessible within a day, but not instantly, to avoid the temptation of spending it on non-emergencies.

Remember, the main goal of an emergency fund is not to create wealth but to protect yourself and your future wealth. By prioritising an emergency fund, you can ensure that you have financial security and are prepared for unexpected expenses.

Use a micro-investing app

Micro-investing apps are a great way to start investing with a small amount of money. They allow you to put small amounts of money to work over time. For example, a micro-investing app might allow you to round up your credit card purchases to the nearest dollar and invest the difference while also allowing you to deposit funds when you have extra money (like $100) to invest.

There are many micro-investing apps available, and they can be a safe and convenient option for investors. These apps often support paperless transactions and provide real-time updates on fund performance, Net Asset Value (NAV), and market news. They also typically employ robust security measures, such as encryption and two-factor authentication, to protect your financial information and transactions.

When choosing a micro-investing app, consider factors such as fees, investment options, ease of use, and security. Look for an app that offers a wide range of investment options, including stocks, exchange-traded funds (ETFs), and mutual funds. Compare the fees and expenses associated with each app, as some may offer lower costs than others. Ensure that the app provides a user-friendly interface, making it simple to navigate and invest. Also, look for apps that prioritise security and have measures such as encryption and two-factor authentication in place.

• Acorns: Acorns is a robo-advisor that offers a clean and uncomplicated user interface. It provides up to a 3% match on IRA contributions. Acorns may be a good option for kids, as it includes a kid-friendly debit card and learning app.
• Stash: Stash supports both automated and DIY investing in the same platform. It offers a Diversification Score tool, thematic ETFs, and fractional shares.
• Webull: Webull gives you the option of using an interface for advanced trading or long-term, hands-off investing. It offers commission-free stock, options, and ETF trades, and access to cryptocurrency.
• Fidelity: The Fidelity app is suitable for both beginners and advanced traders. It includes real-time quotes, multi-leg options trading, research offerings, and a notebook to save ideas and articles.

Invest in index funds

Index funds are a great way to invest $100. They are a low-cost, easy way to build wealth and are less expensive than actively managed funds. They are also considered safer than investing in individual stocks, as they are less volatile and carry less risk.

Index funds are a group of stocks that mirror the performance of an existing stock market index, such as the S&P 500. When you invest in an index fund, you buy a piece of every company held in that index. For example, if you invest $100 in the SPDR S&P 500 ETF Trust, you will own a tiny portion of all 500 companies in the S&P 500 Index.

• Have a goal: Know what you want your money to do for you. Are you looking to make a quick profit or let your money grow slowly over time? If you're saving for retirement, index funds may be a great option.
• Research index funds: Consider factors such as company size and capitalization, geography, business sector or industry, asset type, and market opportunities.
• Pick your index funds: Look for funds with low costs, as these will be cheaper to run and will give you better returns over time.
• Decide where to buy: You can purchase an index fund from a mutual fund company or a brokerage. Consider factors such as fund selection, convenience, trading costs, and impact investing when choosing where to buy.
• Keep an eye on your index funds: While index funds are passive management, you should still monitor their performance. Make sure the fund is mirroring the performance of the underlying index and watch out for high fees.

Remember, investing in index funds is a long-term strategy. Don't worry too much about market highs and lows, and focus on your investment goals.

Fractional shares

You can also reinvest dividends into fractional shares. If a company pays a dividend of $1 per share and you own 0.5 shares, you will receive a $0.5 dividend.

There are a few downsides to fractional shares. If you want to transfer shares to another broker, your fractional shares may need to be sold first. Additionally, you generally won't be able to participate in shareholder votes or voluntary corporate actions like tender offers with fractional shares.

Several brokers offer fractional shares, including Charles Schwab, Fidelity Investments, and Robinhood. With these brokers, you can buy fractional shares of stocks or ETFs for as little as $1 or $5.

Put it in your 401(k)

If you have a 401(k) or other employer-sponsored retirement plan, putting your $100 into it could be a great investment option. This is especially true if you haven't maxed out your employer's matching contributions. Most employers will match a percentage of the money you put into your 401(k). For example, if your employer matches 50% of your contributions up to 3% of your pay, and you earn $50,000 per year, they will put $750 into your 401(k) for the first $1,500 you invest. That's a 50% gain on your monthly investment of $125.

Another benefit of investing in your 401(k) is the tax advantages it offers. Every dollar you contribute to your 401(k) is considered a pre-tax contribution, meaning you won't pay income tax on that dollar for the year you contributed it. Additionally, your investments will grow tax-free until you start taking distributions in retirement. This can result in significant tax savings over time.

However, it's important to note that there are usually penalties for early withdrawals from a 401(k). Typically, there is a 10% penalty for withdrawals before the age of 59.5, on top of the regular income taxes you will have to pay. Therefore, a 401(k) is best suited for long-term retirement savings rather than short-term financial goals.

While it may not be possible to contribute 100% of your salary to a 401(k) due to legal and practical constraints, maximizing your contributions within the allowable limits can be a great way to boost your retirement savings and take advantage of the tax benefits offered by these plans.

Frequently asked questions