5 Steps Investing With Little Money

4. Take Action

female investor using smartphone app

Once you’ve gotten a decent handle on the overall market’s activity and analyzed a set of attractively-valued companies you think stand out from the rest, it’s your time to pull the trigger.

Alternatively, as I mentioned in step 3, consider investing in low-cost index fund exchange traded funds through a robo-advisor like M1 Finance, a self-directed broker like Public or a micro-investing app like Acorns.

5. Continue Following the Companies and the Stock Market

investing from smartphone

By doing your due diligence, you will be able to follow these companies and see if they continue to perform as you expect. If a company makes a decision you don’t agree with or think will adversely impact its value going forward, it might be a good idea to cut your losses short and move on.

Investing well can produce very rewarding experiences you share with those you love. For me, it allowed me to buy my first home and now to grow my assets enough to purchase my next one together with my wife to start our family.

In general, developing your own disciplined investing approach based on rational, informed decision-making can lead to financial peace of mind.

Learning how to invest wisely at a young age will have you maximize your youth by allowing compounding to work to your benefit and see how to build wealth.

Do yourself a favor and invest in stocks by following these 5 steps on how to start investing money.

couple holding hands

Finishing the conversation with my brother-in-law, as I laid out this process to meet his interest in becoming a student of markets, I stressed how these are the first steps to developing a disciplined investing approach.

Taking the mindset that informed investing can lead to real gains, I saw he wanted to jump in and work toward developing his own investing approach and investment plan.

He may not become the next Warren Buffett but following through will allow him to have his (wedding) cake, and eat it too.

How to Invest in Stocks for Beginners with Little Money

Below, read more questions and answers about how to invest money in stocks, including the considerations you should make for the time to start investing in the stock market.

When Should I Start Investing in the Stock Market?

Step 1: Investing in Stocks is Long-Term; Focus First on Today’s Needs

begin investing young

First, you shouldn’t save anything for the long-term if you’ve got needs that must be addressed today.

  • Behind on bills?
  • Need to eliminate costly credit card debt?
  • Have to fund an emergency savings fund to guard against backsliding into debt even further?

Don’t let these expenses get out of hand. Instead, you need to build a solid financial rock upon which you can grow.

  1. Establish an emergency fund: This entails saving a minimum of 3-6 months (or even 12) of your on-going monthly expenses. While this might sound like a lot if you’ve got nothing currently, start small with $100, then $1,000 and eventually $5,000. Make sure you’re realistic with your budget and fully fund this personal finance priority before contributing anything meaningful toward retirement.
  2. Pay off credit card debt: You’re not alone if you’ve got credit card debt that’s been piling up. Paying off your credit card debt is a must before saving for retirement because it will save you money in the long-term. The interest rates paid on credit card debt almost always outweigh what you could receive by investing for retirement in stocks and bonds. Credit cards usually charge in excess of 15% APYs, sometimes north of 20%. While stocks and bonds can have years where they return this amount, over very long periods of time, you’re more likely to encounter returns between 7-10% per year on average with a well-diversified portfolio of equities and fixed income. If you have any amount of credit card debt, make sure to pay it off as soon as possible so you can start saving for retirement without worrying about this emergency expense.
  3. Get current on bills: You might be thinking that you should save for retirement before paying off your bills, but this is a mistake. If you’re behind on your monthly bills then you need to take care of these past due expenses before saving for retirement. Getting current on all of your financial obligations is important because it will make sure that if anything were to happen in the future where you couldn’t work or had emergency expenses come up, then there would be no debt hanging over your head.

You can lower your credit card debt quicker by signing up for an app like Tally, which extends a lower cost line of credit to cover your existing credit card debt and putting an end to late payment fees.

For student loans, you may have received a reprieve from governmental orders during the COVID-19 pandemic, but payments resume in early 2022.

Now, you’ll need to resume payments but can lower the interest rate you pay by using a student loan refinancing marketplace like Splash Financial.

The service pulls real-time quotes from several refinancing lenders in the market to give you a sense of the best refinancing option available to you.

My wife used a loan refinancing marketplace when her first round of student loans required payments to start and she dropped her rate from 8.00% to 2.85%, reducing her average rate by 515 basis points and saving us thousands in interest!

If you’re in a similar situation with high-cost student loans, consider using Splash Financial to find your best rate and lowering your cost of repayment.

Depending on the savings you can receive, this guaranteed savings often makes for a wise financial decision.

Once you can get a handle on your high cost debt and student loans responsibly, you should look to invest money in your retirement accounts, like a 401(k) or IRA, and taxable brokerage accounts to grow for the long-term.

Step 2: Invest Early, Invest Often (and Diversify)

couple reviewing investments

I’m a huge believer in working toward financial independence, or having the financial resources to make decisions not guided by money.

That means you need to have enough saved and invested. To get there faster, you’ll need to save more now.

I suggest saving more than the standard 10-15% of your income per year if you can afford. This will give you either A) a more comfortable and secure retirement at the traditional age (65-68) or B) a chance to retire earlier.

How much earlier depends on when you start saving, how much you contribute, the portfolio you choose and the investment returns you receive.

To get started, consider the following investing strategy:

  1. Pay off debt, save an emergency fund. This again? Yes. These short-term needs aren’t something you can avoid. Prioritize the now in this instance as the costs of being behind on bills, credit card debt or student loans is far greater than the upside you’d see long-term for investing from retirement. Those costs you see in your mail are certain. You can always save more if you get started a bit later on your retirement with a chance to catch up.
  2. Work your way up the retirement savings account ladder. This means starting with an order of investment accounts to capture the greatest return for yourself. It starts with an emergency fund but then quickly goes into investment accounts. If you work for an employer who offers a retirement match, or money they agree to contribute alongside yourself into a 401k, 403b or 457 plan, you should start here. Make sure the investment options provided make sense and are lower cost. If they have index funds in the employer-sponsored plan menu, you’ve found a good set of investments to hold for decades to come. If you get a match, take full advantage of it! That’s free money you can call yours risk-free. Invest up to the match at a minimum. That means if your company offers a 4% match on your contributions, invest at least 4% of your annual pay.
  3. Contribute to an IRA. Next up are individual retirement accounts, or IRAs. These accounts come in two types: traditional and Roth. Traditional IRAs allow you to deduct your contributions in the year you make them (subject to certain income limitations) and pay taxes when you withdraw money in retirement on a tax-deferred basis while Roth IRAs work the opposite: pay taxes upfront and see your investments grow tax-free. If you’d like to open an IRA, consider whether you think you’re paying higher taxes now or whether that’ll happen in retirement. If you think taxes are higher now, contribute to a traditional account. If you think they’ll be higher for you in retirement, contribute to a Roth IRA with M1 Finance or other investing companies that don’t charge commissions.
  4. Standard brokerage accounts. If you have all these bases covered and you’re hitting the maximum for all of them, consider investing in a taxable brokerage account deemed as one of the best investing apps for beginners. This after-tax money isn’t tax-efficient, but it does provide you with liquidity if you need money before retirement.

Step 3: Rinse and Repeat (and Repeat)

excited young investor medium

Micro investing is an easy way to start investing because of the low capital commitment and minimal (if any) investment minimums. Though, for it to really make a difference for your financial needs, it can’t be the only way you save for retirement.

In fact, you’ll need to supercharge these contributions in short order to take advantage of compounding returns over time on increasingly larger sums of money.

Said differently, you want to contribute as much as you can as early as you can to allow compounding returns in diversified investments to do the heavy lifting if you want to actually live out your retirement dreams.

The great news is that the earlier you get started, the more time you have to put your money to work. That’s the power of compound growth! Here’s what that could look like for you:

Let’s say you’re 30 years old, making the average household income of around $66,000. You decide to invest $600 per month in your retirement accounts, all inclusive of any employer match you’d receive.

That amounts to just over 10% of your income every year. If you retire at age 67, you could have over $2.1 million in your retirement savings.

This assumes an average 9% annual return, which is a bit under the inflation-adjusted average annual return of the S&P 500 of the last 50 years.

In short, a realistic growth rate if you leave your funds investing in a S&P 500 index fund over multiple decades.

That sounds pretty great, right? But it gets even better. Of that total $2.1 million, your contributions only make up around $266,500.

That means 90% of that total is money provided by the market—not your wallet!

But, if you made the same decision to start investing $300 per month at age 22, you’d have $2.2 million. $600 a month? $4.4 million!

And if you really want to save and retire early, say at age 55, consider investing $1,000 per month starting at age 22. Certainly a steep contribution to start, but if you can manage it, that decision will pay off significantly: $2.4 million.

If you can manage $2,000 per month, you could retire at 50 with $3.0 million.

The lesson here: start early and invest as much as you can as early as you can.

Where Should I Keep Money Outside of the Stock Market for Short-Term Needs?

savings account

Set aside money in an emergency fund and short-term financial goals like buying a house by opening savings accounts. This money is FDIC-insured, meaning there is low risk of your funds getting lost if the amount if below $250,000 at one bank.

You can even earn passive income from short-term interest rates paid on these savings accounts.

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