Investing Without Cash: Strategies For Building Wealth From Scratch

Investing with no cash is possible, and there are several ways to do it. Here are some strategies to get you started:

- Take advantage of your company's retirement plan: Contribute to your employer's retirement plan, such as a 401(k). With each paycheck, a small amount can be deducted and put towards your retirement savings. If your employer offers matching contributions, that's free money to boost your savings even further.

- Buy fractional shares: Instead of purchasing a full share of a company, you can buy a fraction of a share. Brokers like Stockpile and SoFi Active Trading allow you to buy partial shares, helping you build your portfolio gradually.

- Use dividend reinvestment plans (DRIPs): DRIPs allow you to invest small amounts directly with the company. You can buy dividend-paying stocks and automatically reinvest the dividends to purchase more shares over time.

- Robo-advisors: Robo-advisors have low barriers to entry, with some requiring as little as $500 to start. They make investment decisions for you based on your criteria and can be a hands-off way to get started with investing.

- Micro-investing: Apps like Acorns allow you to invest your spare change. It rounds up your purchases to the nearest dollar and invests the difference. Over time, these small amounts can add up and provide a solid foundation for your investment portfolio.

- High-yield savings accounts: While not as lucrative as other investments, saving money in a high-yield savings account is a simple and low-risk way to earn interest on your money.

- Real estate crowdfunding: With crowdfunded real estate, you can team up with other investors, pool your money, and purchase real estate together. This allows you to become a partial owner of a property with a relatively small investment.

Take advantage of your company's retirement plan

If you're looking to invest but don't have cash on hand, one option is to take advantage of your company's retirement plan. This not only helps you save for the future but also offers several other benefits that can put you on the path towards financial security. Here are some reasons why contributing to your company's retirement plan is a smart move:

Reduce Your Taxable Income

Contributions to employer-sponsored retirement plans are typically tax-deferred. This means that the amount you contribute reduces your annual taxable income for that year. While distributions at retirement are taxed, it's likely that you'll be in a lower tax bracket as a retiree, resulting in overall tax savings.

Earn Tax-Deferred Growth

With a tax-deferred retirement plan, the investment earnings are also tax-deferred. You won't have to pay taxes on your interest or gains until you withdraw the funds at retirement, allowing your savings to grow without being chipped away at by taxes.

Get "Free Money" with Employer Matching

Many companies offer matching contribution programs as part of their retirement plans. This means they will match a certain percentage of your contributions, giving you essentially "free money" to invest. By not participating in such programs, you're missing out on this benefit and the potential for higher retirement savings.

Easy and Convenient

Retirement plans set up through your employer are often the easiest way to start saving for retirement. Contributions are typically made through convenient payroll deductions, and you don't need to worry about the hassle of setting up a separate investment account.

Attractive Benefits for Employees and Employers

Retirement plans are not just beneficial for employees but also for employers. They can help attract and retain talented employees, reduce taxable income, and provide significant tax advantages for both parties. Additionally, retirement plans can improve employee motivation and productivity, especially if the plan is based on profits.

Long-Term Financial Security

Retirement plans are designed to help you invest for financial security during retirement. Even if you don't have a large amount to contribute, starting with small, regular contributions can grow into significant savings over time, thanks to the power of compound interest.

Buy fractional shares

Fractional shares allow you to invest small amounts in companies whose share prices are otherwise unaffordable. For example, if a company's share price is $100 and you only have $25, you can buy a quarter (25%) of a single share for $25. This enables you to diversify your portfolio by investing in several companies.

There are several platforms that allow you to buy fractional shares, including Sharesies, Raiz, Stake, Interactive Brokers, and eToro. Sharesies, for instance, lets you invest as little as 1c in a fractional share of a company or exchange-traded fund (ETF) listed on the Australian, New Zealand, or U.S. sharemarkets. Raiz offers a similar service, allowing you to invest from $5 at a time in set portfolios that vary in risk levels.

When you buy a fractional share, you are typically not the registered owner of that share. Instead, your fractional ownership is usually facilitated through a custody arrangement, where the broker is the registered owner of the whole share, and you are the "beneficial owner". This means your money and investments are held in trust for you by the legal owner.

Before investing in fractional shares, it's important to consider the fees and charges involved, as these can quickly eat away at your account, especially if you have a small amount to invest. Additionally, as the beneficial owner, you may not be able to transfer your fractional shares to a different broker or into your name. In such cases, you would need to sell the shares and repurchase them, which would likely have tax implications.

Fractional share investing offers a low-cost way to start your investment portfolio and improve your financial literacy. It also makes diversification more affordable, as you can spread your money across multiple companies with lower risk. However, it's important to remember that you will also have lower profits due to your fractional ownership, and not all investments may be profitable.

Use dividend reinvestment plans

Dividend Reinvestment Plans (DRIPs) are formal programs offered by publicly traded companies that allow investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date.

DRIPs are a good option for those with no cash to invest because they allow you to invest small amounts of money into a dividend-paying stock by purchasing directly from the company. Companies like GE, Coca-Cola, Verizon, Home Depot, and Johnson & Johnson allow investors to make regular purchases of very small amounts of stock and reinvest the dividends. Over time, this can add up to a big investment.

There are two main types of dividend reinvestment plans: brokerage account plans and company DRIPs.

Brokerage Account Plans

With brokerage account plans, you can access multiple investment types, including individual stocks, mutual funds, and ETFs, all from the convenience of a single account. This option makes it easier to diversify your holdings, either by investing in many dividend stocks or by choosing a mutual fund, which invests in many companies on your behalf.

However, not all brokers offer fractional shares, and brokers do not offer stock at a discount.

Company DRIPs

Company DRIPs allow you to purchase stock by reinvesting your dividends, and companies will often let you buy additional stock on a fractional basis. Some companies offer their stock at a discount to the market price, and some do not charge commissions or fees to enroll or buy shares.

However, companies may follow their own schedules for investing your money, which could result in fluctuations in the stock price between the time the company receives your "buy" request and the time it invests your money. Some companies also require that you're already a shareholder to enroll in a DRIP. There may also be enrollment and other fees associated with company DRIPs, and managing multiple company DRIPs may entail more paperwork than holding a single brokerage account.

Pros and Cons of DRIPs

DRIPs can be a powerful way to boost your returns over the long term, but it's important to keep an eye on your investments and avoid putting too much in one place.

One of the biggest advantages of DRIPs is the ability to accumulate more shares without having to pay a commission. The cost basis for owning the shares can be significantly lower than if the shares were purchased on the open market, and investors can also buy fractional shares.

Another advantage is the effect of automatic reinvestment on the compounding of returns. When dividends are increased, shareholders receive an increasing amount on each share they own, which can be used to purchase a larger number of shares. This increases the total return potential of the investment.

However, reinvesting dividends means you won't receive the cash from the dividend, which could be used for other purposes, such as spending it or investing it elsewhere. You may also have to pay taxes on reinvested dividends, and if you don't receive the cash payout, you'll need to pay those taxes from your own funds.

Micro-invest with apps

Micro-investing is a strategy that involves putting small amounts of money into the market. Many micro-investing apps are available for download, each with different features and functionalities.

• Robinhood is a good choice if you want to take a deeper dive into the stock market but aren’t quite sure where to start. The app is simple and designed for new investors, with no confusing language or complicated features. It doesn't charge any commission, and there is no charge for opening or operating an account. It also allows you to trade full stocks and buy and sell with Bitcoin.
• Acorns is a good option if you want to be hands-off with your investments. After connecting your bank account to the app, Acorns will round up your purchases and deposit the spare change into your Acorns account. Once your account reaches $5, Acorns will start investing for you.
• Public.com combines investing with social media. The platform lets you connect with other investors and interact with more experienced traders. It offers commission-free trading, fractional shares, a referral bonus, real-time trading, in-app support, and no minimum investment amount.
• Stash is designed for beginners who want to be hands-on with their investments. It has transparent fees and doesn’t charge any trading fees or commissions. After connecting your bank account, Stash will ask you some questions to determine your risk level. You can then pick the types of companies and portfolios you’d like to invest in, choosing to invest your money in causes, specific interests, products, services, or specific companies.
• Betterment is for those who want to be hands-off with their investments but still desire access to real financial advisors. It offers two types of services: Betterment Digital and Betterment Premium. The former has no account minimum and a small fee, while the latter has a higher fee but gives you easier access to financial advisors.
• SoFi is one of the easiest investment platforms to use, with a straightforward mobile app for managing all your investments. You can invest in stocks, ETFs, and crypto, as well as get early access to IPOs. SoFi also offers robo-advising and automated investing with no account management fees.
• M1 Finance is a platform that is a hybrid of automated investing and customization. It offers similar features to SoFi but is built around the concept of pies, or portfolios. You can choose from over 80 pre-made pies or create your own by choosing the stocks and funds you want to invest in, including fractional shares.
• Greenlight is unique in that it is designed specifically for teaching kids and teens about investing. The platform comes with banking features and teaches the basics of personal finance and investing. Kids and teens can invest in the stocks and ETFs they choose with parental consent.
• Webull is a sleek mobile app with advanced trading tools. It is user-friendly and suitable for beginners, but also powerful enough for experienced investors. It offers commission-free trading on stocks, options, ETFs, and ADRs, and recently added crypto to its lineup.
• Wealthsimple offers automated investing with access to a financial advisor or the option to trade actively. You can choose a robo-advisor account or trade actively, with no account minimums or commissions.

Each of these apps has its own unique features and benefits, so be sure to research them thoroughly before deciding which one is right for you.

Turn to private lenders

Turning to private lenders is a great option for real estate investors. Private lenders are individuals who use their own capital for real estate investments. They are not part of a bank or other financial institution and will deal with you directly when negotiating the terms of the loan.

Private money lenders are more relationship-based and can even be a friend or family member. They often have different approval requirements and may not care about your credit score at all. They also usually move at a faster pace than traditional lenders.

• Create Your Portfolio: When meeting with a potential private money lender, it is important to show them that you mean business and are trustworthy. Present your business plan and showcase your track record of successful investments and timely payments.
• Network: Attend real estate investment meetings, seminars, and network through online forums and platforms. Join local business-owner meetups and be active on social media to find potential lenders.
• Master Your Pitch: When approaching a potential private lender, start with small talk to build a relationship. Get into the details of how the deal will work out in their favour and explain the potential returns. Show your due diligence by providing thorough research and information about the investment.
• Build an Email List: As you grow your investing business, you will meet many people with money. Add them to an email list and stay in touch by sending newsletters or updates about potential investment opportunities.
• Meet with Potential Lenders: Set a goal to meet with one new person each week who you think might have access to a good chunk of capital. This could be a well-known money lender in your area or someone in your network who has the financial ability to meet your needs.
• Offer Equity: Consider making the lender an equity partner in the deal, especially for larger projects. Instead of paying monthly interest payments, offer them a percentage of the profit from the deal, such as 50%.
• Use a Tiered Interest Rate System: Offer a higher interest rate for larger investment amounts to incentivize people to invest more money with you. For example, offer 8% interest for investments of $100k or less, and increase the rate to 10% for investments between $100k and $200k.
• Be Transparent: Always maintain transparency and stay true to your mission and values. Avoid inflating your portfolio or background to attract potential investments. Let your work speak for itself and focus on building trust with potential lenders.

Frequently asked questions