There are so many ways to start investing with little money. I wanted to highlight what I consider to be the best options for your first foray into the world of investing.
My top 5 are:
- Invest in knowledge
- Pay down debt
- Extra retirement contributions
- Dividend stocks
- Mutual funds
I feel that all of these options can create value in your life, and ultimately make you richer, without any sort of specialized knowledge.
And if 5 ideas isn’t enough for you, here’s 50 more.
1. Invest In Your Knowledge
In my opinion nothing is more valuable than the knowledge you acquire. When you’re starting out as an investor, the two most important things are to actually get started and continue to learn. These two things also correlate with the two biggest mistakes new investors make.
Two biggest mistakes of new investors
One of the big mistakes I see new investors make is they read and soak up knowledge, and then they read some more and they just keep learning, but they’re too scared to actually pull the trigger. They worry so much about what can go wrong and how they can lose money, that they can’t invest in anything.
That’s just another way to lose money. If you invest your money somewhere you can absolutely lose it.
But guess what? If you keep putting your money out there, eventually you will make money. And by being too scared to act, you’re losing out on the money you would have made by investing. So get rid of the fear. Understand that you will lose money, but you’ll make more than you lose over time.
The second biggest mistake I see is people just letting others tell them what to do. They don’t continue to learn and develop their understanding of the things they’re investing in.
They here Dave Ramsey say “invest in mutual funds!” And I’m not saying that’s bad advice. But what I am saying is that it’s bad to just take someone’s advice without understanding why you think it’s a good idea.
So invest now, even if it’s based on someone’s advice, but then keep learning about your investment. Decide for yourself if it makes sense to you, and if you think you have a better idea then follow your analysis.
Invest in knowledge with books and other media
My first recommendation for investing with little money is to invest in your knowledge. This can be a completely free investment, but you may also want to spend as much as a few hundred dollars on books, subscriptions or even conferences.
Here are the ways I invest in my knowledge.
The great thing about books is you can learn from those who have done what you want to do. If you want to invest in real estate, you can read the thoughts of someone who has had success investing in real estate. And if stocks interest you, then you can learn from someone who made a fortune in the stock market.
I say this often in my blog, but I’m a believer that “you are the average of the five people you spend the most time with,” and you can change the average of your five by reading the words of successful authors.
I mean you’ve clearly got this one figured out if you’re reading this article. Type your questions into your preferred search engine and start reading.
My only word of advice is to try and be critical of the ideas you read online. Lots of writers, especially for the big websites, are professional writers, not investors.
Many of the most successful people in history have been a part of a mastermind group. The idea is you come together with a small group of people and you help each other solve the problems you’re dealing with.
In my experience, you nearly always come up with better solutions to your problems when you get other minds involved. Talking about money is very taboo in social situations I find myself in, and not talking about money is a great way to remain ignorant.
Get together with people who aren’t afraid to open up about the details of managing finances and investments. The more you talk about it, the more you’ll get comfortable being critical about your own decisions.
You’ll find plenty of ways to spend money trying to gather knowledge online. You’ll find bloggers offering paid courses and eBooks, you’ll find sites that offer paid subscriptions to get access to special information, you can pay to get coaching and you may even find retreats or conferences to participate in.
Like every other form of knowledge, some of these are absolutely worth the money and others aren’t. I’ve spent money on things like this only to be given promises of great success if I only buy the next product they’re selling. But I’ve also spent money to receive a great product that made me a better investor.
Be cautious, but don’t be afraid to pay for a product you believe can provide you with the knowledge you need to succeed.
2. Extra Debt Payments
Most people have debt of some kind. Paying down bad debt is usually a great investment decision (car loans, tv and furniture loans, school loans, personal loans and often even your mortgage).
The reason I like paying down debt as an investment is that it’s a cash flow investment. Paying off a loan increases your cash flow. There are other benefits too, like making yourself more attractive to lend to.
Let’s talk about what makes paying off a loan a great investment or an average investment.
Good debt vs. bad debt
First, it helps to understand good vs. bad debt. Simply put, good debt makes you richer and bad debt makes you poorer.
Any debt held against something that depreciates in value over time is always bad debt. A car loses value over time, so a car loan is always bad debt. It makes you poorer.
Same goes for loans on personal items like electronics and furniture. I consider school loans bad debt once you graduate. It’s often a necessary debt, but it still makes you poorer once you’re out of school and that makes it bad debt.
A loan against real estate can be good debt or bad debt. Your real estate should gain value over time, but that doesn’t guarantee your home loan is good debt.
The only thing about a home that tries to make you richer is the appreciation of the home. There are a lot of things that try to make you poorer though:
- Interest on your home loan
- Maintenance costs
For most people these costs outweigh the benefits of home appreciation.
But let’s move on. How do we decide which loan to try and pay off first?
Cash on cash return
Cash on cash return is one of the most useful metrics for a cash flow investor. It helps determine how best to use the money we currently have.
Here’s the gist. You want to put your money in the place that returns that money to your pocket as fast as possible.
Here’s an example.
You have two loans. One is a $1,000 on your TV with $100 payments every month and the other is a $80,000 loan on your home with $600 payments every month.
You have $1,000 you want to invest. Paying off your home loan would increase your monthly cash flow by $600 per month, but the problem is it will take you years to pay off that loan.
If you instead pay off your TV loan right now, that $1,000 will be back in your pocket after 10 months because you’ll save $100 per month on the payments you would have made.
And that’s how a cash flow investor makes decision.
And don’t forget that paying off debt can never be a negative come tax time.
You only get taxed for gains. Making more money from a paycheck, making more money from an investing activity or selling something that’s worth more now than it used to be.
Debt is none of those things. It’s just getting rid of a bill. Lowering your expenses adds no tax burden to you. It’s the ultimate cash flow. Every cent of that (now eliminated) loan payment goes straight into your pocket.
3. Extra Retirement Contributions
While I am personally not a big supporter of retirement plans, I do think they provide the most convenient way for the average person to invest.
When you only have a bit of money to invest, things like real estate and business purchase aren’t an option (at least not unless you save more money). So if you want to put your $100 to work right now, you can send it straight to your 401k, 403b or IRA today.
You’ll probably get somewhere between a 5-12% average return over the next 15 years.
The best part about these retirement plans is that your money will grow tax free. When you purchase stocks outside of a retirement plan you pay taxes on their increase in value. Retirement plans can increase in value without taxation.
Again, retirement plans are a reasonable investment for a lot of people, but they’re not really my thing. Here’s why.
My big (personal) knock on retirement plans
Retirement plans allow your money to grow tax free, but they also come with some additional rules that do not benefit anyone planning to retire early. I think putting too much money in your retirement plans creates a mindset that you won’t retire until the normal retirement age.
When you withdraw money before you reach a certain age (the retirement age), you must pay penalties on the money. You pay penalties not just on the gains, but all the money you withdraw. Basically, if you withdraw money before that age, you would have been better off keeping it out of the plan altogether.
So if your plan is to retire before that age, you may find that investing more money in your retirement plan isn’t the way to go.
The argument in favor
Particularly for those who have a hard time keeping money in their bank account, I think sending extra money to your retirement fund every month is a good idea.
This guarantees that the money will go towards your savings/investments instead of towards a new pair of jeans.
And even though I’m not a fan of retirement accounts, I don’t think it’s ever going to be a bad thing. Plus, if you have a 401k you can always give yourself a loan to invest in something better.
4. Dividend Stocks
Dividend stocks are simply stocks that pay dividends. And dividends are usually cash payouts to you, the shareholder.
While I’ve thus far kept my investing mostly to real estate and business, I recently began dabbling in dividend stocks.
Let me tell you why I’ve started sending some of my money to dividend stocks lately.
Cheap, passive cash flow
Real estate is great for cash flow, but it has two big hurdles. The first is that you have to save up your money for a while in order to afford a down payment. In my area I need a minimum of $25,000 and often $40,000 or more to purchase a single family home. And I live in a pretty cheap area.
That’s a lot of money.
The other hurdle is once you do purchase, you’ll often put at least a few hours a month into managing the property. Since we do more short term rentals, it can be several hours a week during peak traveling seasons.
Dividend stocks have neither of these two problems, and that’s why I’ve been slowly allocating small amounts of money towards them.
They still provide cash flow (albeit much less cash flow), just without the up front costs and the time investment.
Long established companies
It is possible to find newer companies paying dividends to their shareholders, but most companies that pay dividends are very established.
Big utility companies like Duke Energy, big tech companies like Microsoft and IBM and big banks like JP Morgan are the types of companies paying dividends.
I personally like buying stocks in these companies because I know they will almost certainly still be making money in 10 years. And if they’re not I know I’ll be hearing about it in the news even without having to pay attention.
Taxation of dividends
The government likes to tax cash gains at the income tax rates, which are the worst rates (at least in the U.S.). But most dividends are taxed at the long term capital gains rate, which is significantly better. In fact a decent portion of your dividends may be completely tax free.
5. Invest In Mutual Funds
Mutual funds are a way for an individual investor to purchase a more diversified portfolio of stocks than they would otherwise be able to do.
Mutual funds take the money of thousands of individual investors and a portfolio manager will invest that money in the best interest of the individual investors.
This setup has benefits for new investors and investors that don’t have much money.
With many investing options, you could take $100 and have to put all that money on a single investment.
One of the arguments for a mutual funds is that they effectively diversify that $100 across more of the market than would otherwise be possible. Your $100 doesn’t all go into one company. It goes to the mutual fund and the mutual fund has investments across many companies and options.
So the value of the mutual fund is dependent on the value of a diversified portfolio of investments, and your $100 is dependent on the value of the mutual fund.
Another argument for mutual funds is that most are professionally managed. That means that someone who invests for a living will be deciding what to do with your money.
Now I will point out that there have been many studies showing that professional management over long periods of time rarely outperforms the average stock market return. So you may be just as well off putting your money into an index fund, which is kind of like a mutual fund without a fund manager.
Index funds are a type of mutual fund comprised of a relatively static set of stocks. Most mutual funds are actively managed and their portfolio can change every day potentially. Index funds will change very infrequently.
For some, having a professional manage their money gives them piece of mind, however the data shows that this is probably the only thing it does.
Whichever way you go you’re probably looking at 5-12% returns over the next 15 years.
Investments I Would Avoid
Now you have my top 5 investments for those with little money. I want to spend some time discussing some investments that I would avoid, even though you can get into them without much money.
Many of these investments will have the same problem. Their historic return values just don’t compete with other kinds of investments. In some cases they don’t even keep up with inflation!
High yield savings accounts
The last high yield savings account I looked at offered a 1.1% yearly interest rate. The average inflation rate in the U.S. is around 3%.
What this means is if you put your money in a high yield savings account your money will grow, but it will be able to purchase less.
I think there are good uses for high yield savings accounts, and one of them is to put your emergency fund there. It keeps your money easily accessible, but since you’re getting some return, it’s much better than leaving your emergency fund in a checking account.
But as an investment, I’d steer clear.
Bonds are another example of an investment I would avoid. Return potential is a bit better than high yield savings accounts at around 3%. This return will essentially keep your money from losing value over time. It’s equal with inflation.
Bonds also have the benefit of providing cash payments usually twice a year. In fact, from a certain point of view you could consider bonds a cash flowing asset.
But the problem with bonds is the same as high yield savings accounts. They’re just not making you richer.
I have heard of investment banks making a lot of money in the bond market, but I believe this is done by purchasing bonds at extreme discounts. If you can do better than 3% with bonds, I’d love to know how. Until I do though, I’m avoiding them.
Certificates of deposit
CDs have a few issues. First is that recent rates on CDs, even terms as long as 10 years, are terrible. As of August 2020 rates are universally below 2%.
A few decades ago you could get a CD with interest rates well above 5%, but those days seem to be behind us.
Even if you could get competitive interest rates, there’s another problem. The money held in CDs is difficult to access. That’s kind of the whole point. You’re promising the bank that you won’t withdraw the money for a set period of time and in exchange they give you a decent return on that deposit.
CDs are like a retirement fund, except they aren’t tax free, and they don’t get anywhere near the return numbers of the stock market.
Gold and other precious metals
This is one that surprised me. I had considered precious metals a reasonable investment until I discovered how poor their long term returns have historically been.
They are also a very volatile investment. My favorite example is that Silver was worth more 46 years ago than it is today. If you bought silver in July 1974 you would have lost a lot of money.
But here’s the crazy thing. If you bought silver at the right times after 1974 you could have seen returns as high as 23% for 10 years!
Clearly there’s money to be made in the precious metals market, but it almost certainly requires some special knowledge, which most of us don’t have. I’m keeping my money away.
If you’re wanting to invest with little money, then I say keep it simple. You don’t need to go looking for the silver bullet.
It’s always a great investment to stock up on your knowledge. The more you know about investing, the less you’ll need to ask advice from others.
Paying down debt is in my opinion the safest investment a person can make. You know you’ll increase cash flow once the debt is gone, you know exactly how much, and it’s completely passive.
Beyond that I say head to the stock market. You can contribute more to your retirement funds, go for mutual funds, or look for some long established companies that pay dividends.
And steer clear of the low return investment options or anything that requires special knowledge.