Monthly Micro-Investments: Small Steps To Wealth

Investing is an important way to make your money work for you, and it is possible to start investing with small monthly contributions. In this article, we will explore the best ways to start investing with little money and provide tips for making the most of your investments. We will also discuss the benefits of investing early and offer guidance on common mistakes to avoid. So, whether you have $10 or $500 to spare each month, there are options available to help you grow your wealth over time.

Invest in a stock index fund or ETF

Investing in a stock index fund or exchange-traded fund (ETF) is a great way to build long-term wealth. When you invest in a stock index fund, you buy a piece of every company held in that index. For example, if you invest in the SPDR S&P 500 ETF Trust, you will own a tiny portion of all 500 companies in the S&P 500 index. This gives you instant diversification and an investment with a long history of making money for anyone who can hold for a decade or longer.

There are some differences between ETFs and mutual funds, including how you buy and sell shares, the minimum investments, and the fees you can expect to pay. But the general idea behind both is that you can invest in the whole market or selected parts of it through a single investment.

• Choose a well-known index, such as the S&P 500, or a more specialized index that aligns with your interests and goals.
• Consider using a robo-advisor or micro-investing app, which can help automate your investments and make the process easier.
• Look for funds with low fees and minimum investments. Many brokers nowadays no longer charge commissions, and several major brokerages offer fractional share investing, allowing you to invest with smaller sums of money.
• Set up automatic investments to streamline your finances and make consistent contributions to your accounts. This can help you stay on track and reach your financial goals faster.
• Practice dollar-cost averaging by investing a fixed amount at regular intervals, regardless of the share price. This can help push down the average cost of your shares over time.
• Consider tax implications and choose tax-efficient investment vehicles, such as tax-free savings accounts or retirement plans like a Roth IRA.

Make regular investments

Making regular investments is a great way to build your wealth over time. Here are some strategies to help you get started with making small monthly investments:

Set up automatic investments

Consider setting up automatic investments or contributing to your portfolio regularly. This helps to streamline your finances and removes the challenge of deciding when to invest. You can automate recurring bank transfers into taxable or retirement accounts, making it easier to stay on track and reach your financial goals.

Start with small amounts

You don't need a large sum of money to start investing. Even small amounts, such as $10 or £10 per month, can be a good starting point. The important thing is to get into the habit of saving and investing regularly. As your finances improve, you can gradually increase the amount you invest each month.

Utilise employer-sponsored retirement plans

If you have access to an employer-sponsored retirement plan, such as a 401(k) or similar, take advantage of it. You can start by contributing a small percentage of your salary, such as 1%, and gradually increase your contributions over time. If your employer offers matching contributions, it can be an excellent way to boost your savings.

Consider robo-advisors and micro-investing apps

Robo-advisors and micro-investing apps can be a great option for beginners. They use automated algorithms to build and manage a diversified investment portfolio based on your financial goals and risk tolerance. These tools often require very little money to get started and charge modest fees based on your account balance.

Invest in stock index funds or exchange-traded funds (ETFs)

Investing in stock index funds or ETFs can be a simple way to gain exposure to the stock market. When you invest in an index fund, you buy a diversified portfolio of stocks across an entire stock market index, such as the S&P 500. This helps to reduce the risk associated with picking individual stocks. ETFs are similar but trade like stocks and offer more flexibility.

Practice dollar-cost averaging

Dollar-cost averaging is a strategy where you invest a fixed amount of money in your chosen investments at regular intervals. By investing a consistent amount, you buy more shares when prices are low and fewer shares when prices are high, potentially lowering your average cost per share over time. This strategy also helps to reduce the impact of market volatility.

Use a robo-advisor

Robo-advisors are digital platforms that provide automated, algorithm-driven financial planning and investment services with little to no human supervision. They are a good option for those who want to make small monthly investments, as they require low opening balances and are inexpensive.

Robo-advisors work by asking you a series of simple questions to determine your investing goals and degree of risk tolerance. They then use the data to invest your money in a highly diversified, low-cost portfolio of index funds, mutual funds, and/or bond funds.

Low Fees and Minimums

Robo-advisors typically charge low fees, usually an annual fee of around 0.25% to 0.4% of your balance. This is significantly less than the 1% or more charged by traditional financial advisors. Additionally, robo-advisors often have low minimum balance requirements, with some even allowing you to start investing with $0.

Tax Benefits

Robo-advisors can help optimize your investments for taxes, particularly on higher-balance accounts. They use algorithms to automate tax-loss harvesting, a strategy that involves selling securities at a loss to offset capital gains taxes.

Diversification

Robo-advisors build and maintain a diversified portfolio for you based on your risk tolerance and investment goals. They use modern portfolio theory to determine the optimal asset allocation and continually monitor and rebalance your portfolio to maintain the desired weightings.

Ease of Use

Robo-advisors make investing easy by automating the entire process. You don't need any prior investing experience, as they take the guesswork out of investing and handle everything for you.

Security and Transparency

Robo-advisors are registered with the SEC and are subject to the same securities laws and regulations as traditional broker-dealers. Additionally, some robo-advisors, like Wealthfront, offer SIPC insurance, which protects your investment up to a certain amount if the company goes bust.

Customization

While robo-advisors generally invest in a pre-determined set of funds, some allow for a degree of customization. For example, Vanguard Digital Advisor offers three investment options: an all-index option, an active/index option, and an ESG (environmental, social, and governance) option.

Hybrid Models

Some robo-advisors, like SoFi Wealth, offer hybrid models that combine automated investment management with access to human financial advisors. This can be beneficial if you want the convenience of a robo-advisor but also value having someone to turn to for advice or more complex financial planning needs.

Goal Planning

Robo-advisors often include goal planning features, allowing you to set and track various financial goals, such as saving for a house, retirement, or education. This helps you stay focused and motivated on your financial journey.

Account Services

In addition to investment management, robo-advisors may offer additional account services, such as checking accounts, savings accounts, or retirement accounts (IRAs). For example, Betterment offers a "No-fee" checking account with a competitive variable rate, and Wealthfront provides a "No-fee" savings account.

Performance

While robo-advisors won't beat the market, they provide a passive index strategy that seeks to replicate the market's return. This means you can expect returns that are in line with the overall market performance, minus the small management fees charged by the robo-advisor.

In conclusion, robo-advisors offer a convenient, low-cost option for those looking to make small monthly investments. They take the complexity out of investing and provide an accessible way to grow your wealth over time.

Invest in your 401(k)

Investing in your 401(k) is one of the best ways to grow your money. It is a retirement account that allows you to invest pre-tax income, which means you get to keep more of your money rather than giving it away to Uncle Sam in the form of taxes.

With a 401(k), you can invest in the same things as a regular account, but with the added benefit of tax advantages. The money you invest in a 401(k) grows without being taxed, and you only pay taxes on it when you start withdrawing the money, usually after retiring. This means that your investments can grow year after year without being chipped away at by taxes, resulting in a larger nest egg for your retirement.

Additionally, many companies offer a 401(k) match program, which is essentially free money. For example, if your employer offers a 100% match up to $2000, they will contribute $2000 for every $2000 you invest. This is a significant benefit that can help your investments grow even faster.

• Understand how 401(k)s work: Educate yourself about the tax advantages, investment options, and any restrictions or limitations of 401(k) plans.
• Enroll in your 401(k) plan: Contact your HR representative to fill out the necessary paperwork and decide how much you want to contribute. Many plans allow you to contribute a percentage of your salary, and you can often increase your contributions gradually over time.
• Take advantage of company matching: If your company offers a 401(k) match, try to contribute enough to maximize this benefit. It's essentially free money that can boost your retirement savings.
• Choose your investments: Your 401(k) will typically offer a variety of investment options, such as aggressive funds, mixed funds, and target-date funds. Consider your risk tolerance and investment goals when making your choices.
• Automate your contributions: Set up automatic contributions from your paycheck so you don't have to worry about manually investing each month. This makes it easier to stay disciplined and build your investments over time.
• Increase contributions over time: Whenever you get a raise, consider increasing your 401(k) contributions. This way, you can save more without feeling the pinch as your income rises.
• Avoid early withdrawals: There are usually stiff penalties for withdrawing from your 401(k) before you reach retirement age (typically 59 1/2 years old). Leave your investments to grow and only withdraw when you truly need to.
• Diversify your portfolio: Don't put all your eggs in one basket. Diversify your investments across different asset classes, industries, and geographies to reduce risk and maximize returns.
• Stay disciplined: Don't make impulsive investment decisions based on market conditions or personal whims. Pick a diversified allocation strategy that suits your risk tolerance and stick with it for the long term.
• Remember old plans: If you change jobs, don't forget about your old 401(k) plans. You can choose to roll over the funds into an IRA or another retirement account to continue growing your savings.

By following these steps and staying disciplined, you can make the most of your 401(k) and set yourself up for a comfortable retirement.

Open an IRA

An IRA, or Individual Retirement Account, is a personal, tax-deferred account created by the IRS to give investors an easy way to save for retirement. There are three common types of IRAs: Roth, traditional, and spousal. Earnings within your account grow tax-free, and you can choose from a wide range of investment choices.

Decide on the Type of IRA You Want

First, you need to decide whether you want a hands-on or hands-off approach to managing your IRA. If you want to choose and manage your investments yourself, you can open an IRA with an online broker. Look for a broker with low or no account fees, a wide selection of no-transaction-fee mutual funds, commission-free exchange-traded funds, and solid customer support.

On the other hand, if you want a more automated approach, you can open an IRA with a robo-advisor, which will choose low-cost funds for you based on your retirement goals and risk tolerance. Robo-advisors typically charge a fraction of the cost of a human financial advisor and are a great option if you want a professional to handle your investment decisions.

Choose an IRA Provider

Once you've decided on the type of IRA you want, it's time to choose a provider. You can open an IRA with an online broker, a robo-advisor, or a bank. However, banks typically don't offer access to stock market investments, which is what most retirement investors will want.

Open the Account

The process of opening an IRA will vary slightly depending on the provider, but it is generally straightforward. You will usually need to provide personal details such as your Social Security number, date of birth, contact information, and employment information. You will also need to choose the type of IRA you want to open (Roth or traditional).

Fund the Account

There is no age limit for opening or contributing to an IRA, as long as you have a source of earned income. You can contribute to your IRA from a savings or checking account, or transfer assets from an existing IRA or taxable brokerage account. If you have a 401(k) from an old job, you can also roll over those funds into your new IRA.

Choose Your Investments

If you decide to use a robo-advisor, they will choose your investments for you based on your goals and risk tolerance. If you go with an online broker, you will need to select your own investments. It is generally recommended to build a portfolio out of low-cost index funds and ETFs to ensure adequate diversification and minimize fees.

Set Up Recurring Investments (Optional)

To make saving for retirement easier, you can set up recurring contributions to your IRA. This is known as dollar-cost averaging, and it involves contributing a set amount at regular intervals, such as $100 per month. IRAs have annual contribution limits, so be sure to stay within those limits. For 2024 and 2025, the annual contribution limit for IRAs is $7,000 ($8,000 if you're age 50 or older).

Frequently asked questions