Even if you only have a few dollars to spare right now, you can learn how to start investing with that small amount of money. Start investing today with a little money today to have it grow with compound interest and build experience that will be useful when you have more money to invest at some point in the future.
In this article, we’ll break down the basics of investing and ways you can get started investing — even with just that little money in your pocket. Plus, we cover useful investment strategies and common mistakes you want to avoid as a beginner investor.
Why is investing so important?
First things first. Why should you start investing?
You’ve probably noticed that inflation is a constant topic of discussion and always in the news. Life becomes more expensive and everything comes to cost more over time, from buying groceries to filling up your car just to get to work.
You may have also noticed that your income likely doesn’t rise at the same rate. Despite the cost of living going up, you’re probably not earning at a rate to match this increase. There’s ways to ask for a cost-of-living raise but the whole thing probably seems unfair.
That’s why we can’t stress enough the importance of investing your money now, regardless of what stage of life you’re at. You may think that investing is too risky and, we agree, there’s certainly risk involved — but ultimately it’s even riskier to not have funds invested for the benefit of future you.
Here are the reasons why investing is important:
- You want your money to work for you. The money you worked hard for originally can in return work for you over time and earn a return.
- Your money loses value in a bank account. With inflation, your purchasing power drops when you leave your money sitting around, not earning interest.
- A traditional savings account just isn’t enough interest. The national average APY on savings accounts is only 0.45% as of May 20, 2024 according to the Federal Deposit Insurance Corp. (FDIC), which doesn’t keep up with inflation.
- You don’t want to work until you’re 70. The sooner you start, the sooner you’ll have compound interest on your side. The whole point of investing is to ensure you don’t have to work forever and have time to enjoy life. That’s why Financial Independence, Retire Early (FIRE) has grown in popularity.
- You’re missing out on “free money” when you don’t invest. Your investments should be earning you money. When you don’t use your money to make money and let it sit around, you’re missing out on what can essentially be free money.
- You should start investing early to build the habit. The point of investing when you don’t have much money today is to learn how to invest so that you’re prepared when your income does go up.
- It’s easier than ever to invest your money. With the rise of so many platforms, there are so many ways to invest money online. You can make an account easily and start investing with just a couple bucks at a time to get familiar with them.
To put these ideas more into focus (even with just a little bit of money), check out our ‘Latte factor calculator.’ Take just $5 you spend every day and invest it (for real or with our calculator) to see how that can build up over time.
Now that you know why you should be investing and the potential, it’s time to look at the perfect time to start investing. It’s sooner than you think.
» MORE: Best investment accounts for young adults
When should you begin investing?
Before you begin investing you’ll want to make sure the basics of your finances are in order. Investing always involve varying degree of risk, so you’ll be better off if you can be sure you won’t need the money you’re investing for a long time. That’s preferably a horizon of five years or more.
Begin investing after these two financial goals are met:
- Pay off high-interest debt. You should aggressively try to make payments to reduce your debt. At the 2020 Berkshire Hathaway annual meeting, Warren Buffett commented, “…if I owed any money at 18 percent, the first thing I’d do with any money I had, would be to pay it off. It’s going to be way better than any investment idea I’ve got. And that wasn’t what you wanted to hear.” Paying off high-interest debt if you have it is essentially a guaranteed return and should be a top priority before investing.
- Start an emergency fund. Build an emergency fund so that you have three months or more of living expenses in a savings account. You need to ensure you could survive financially if you lost your job or if an unexpected issue, like with your health, that requires immediate funds were to occur you have some cushion without selling your investments.
The goal is to start investing immediately but only after these priorities are met. As soon as you make progress on your debts and start building your emergency fund, only then should you begin to invest your money.
How do you start investing with little money?
Here’s a common phrase I hear about investing: “I’m going to start investing when I have real money to invest.” Why is that?
I’ve heard this from many friends and readers who believe they don’t have enough money to start investing or they’re too broke to start and I always disagree. The thought that you have to be rich to invest couldn’t be further from the truth. You should be thinking about investment strategies as soon as you have even a small amount of money. You don’t magically gain investment knowledge once you cross an arbitrary threshold of ‘real money,’ whatever that is.
It’s understandable that you may be confused about investing when you have competing financial priorities and you’re saving for multiple goals. Heck, you may have debt or you may not have any savings yet.
But apart from the two recommended steps above (pay off high-interest debt, build an emergency fund), it’s never too soon to start investing. Your first investment can be a $1 that you put to work after learning how to buy a stock or a fractional amount in an ETF. You have to start somewhere and shouldn’t wait.
Here are seven methods to start investing with little money.
1. Try the cookie jar approach
Saving money and investing it are closely connected. In order to invest money, you first have to save some. That will take a lot less time than you think once you get started, and it can be down in small baby steps.
If you’ve never been a saver, you can start by putting away just $10 per week. That may not seem like a lot, but over the course of a year, it comes to over $500.
Years ago putting $10 into an envelope, shoebox, a small safe, or even the cookie jar made sense. It may sound silly but it was often the first necessary step to get into the habit of living on a little bit less while putting money aside for a purpose.
Now though, there’s options like high-yield savings accounts (HYSA). They allow you to earn competitive interest on your growing cash and when the stash is large enough or you’re ready to invest, you can take it out and move it into some actual investment vehicles. HYSAs also where you can store your emergency fund. Plus, you get to use that cookie jar for cookies again instead of your stomach.
2. Enroll in your 401(k) or similar retirement plan at work
If you’re on a tight budget, even the simple step of enrolling in your 401(k) or other employer retirement plan may seem beyond your reach. But you can begin investing in an employer-sponsored retirement plan with amounts so small you won’t even notice them.
For example, plan to invest just 1% of your salary into the employer plan. You probably won’t even miss a contribution that small, but what makes it even easier is that the tax deduction you’ll get for doing so will make the contribution even smaller.
You can increase it gradually each year if needed. For example, in year two, you can increase your contribution to 2% of your pay. In year three, you can increase your contribution to 3% of your pay, and so on. Start high as you can, though. If you time the increases with your annual pay raise, you’ll notice the increased contribution even less as it splits between retirement and a direct deposit into your linked checking account.
And if your employer provides a matching contribution, that will make the arrangement even better. This is something you should try to take advantage of to the fullest.
3. Open an IRA, too
Employer-sponsored 401(k)s are great, but they don’t offer the same tax benefits as other retirement accounts, which is why opening an IRA is also important.
For starters, you’ll have more investment options, since you’re opening your own personal IRA rather than going through your employer, where you’re more limited on investment options. Your IRA can hold your favorite individual stocks, like Apple or Microsoft, for example.
In addition, one of the very best benefits of an IRA (a Roth IRA account, to be specific) is its ability to grow tax free. Your account can both grow without being taxed and you’ll be able to make tax-free and penalty-free withdrawals on accounts open longer than five years starting at age 59 ½.
You can open an IRA on any of the best investment platforms, but if you’re starting small we recommend you check out Acorns. With Acorns, you can invest automatically every paycheck in your IRA (or other investment account) by setting up recurring investments with their Smart Deposit feature. It’s also a popular spare-change investing app, investing your spare change with every purchase for you. Those features gel well with those who only have a small amount of money to invest.
Acorns makes it easy to start investing (even if you know nothing) and provides helpful tools to help you save more automatically. In under 3 minutes, start investing spare change, saving for retirement, earning more, spending smarter, and more.
- Effortless automated investing
- Easy-to-use savings features
- Low-cost solution to manage money
- Flat monthly fee more expensive for smaller accounts
- Can use more robo-advisor features
4. Let a robo-advisor invest for you
Robo-advisors entered the investing scene about a decade ago and make investing as simple and accessible as possible. You don’t need any prior investing experience, as robo-advisors take all the guesswork out of investing.
Robo-advisors work by asking a few simple questions to determine your investing goals and degree of risk tolerance followed by investing your money in a highly-diversified, low-cost portfolio of index funds, mutual funds, and/or bond funds. Robo-advisors then use algorithms to continually rebalance your portfolio and optimize it for taxes, especially on higher balance accounts.
There’s probably no easier way to get started in long-term investing for a beginner. Most of the best robo-advisors require very little cash to get started and charge modest fees based upon the size of your account. All offer automated investing plans to aid in growing your balance. One of our favorites is Wealthfront, which minimizes trading (great for beginners) and maximizes long-term gains (great for all investors).
Wealthfront is designed for young professionals, anyone from passive investors who want expert digital guidance, to people who want to be smarter with money.
With low fees and multiple tax perks, automated investment management tuned in to your individual risk level make Wealthfront worth a look.
- Passive investing with automated management
- Tax-loss harvesting
- Ability to customize portfolios
- No fractional shares of ETFs in automated accounts
- No human advisors
If there’s any downside to robo-advisors, it’s cost. Robo-advisors charge an annual fee equal to a small percentage of your balance. The industry average is about 0.25%. So, if you invest $10,000, you’ll pay $25 a year. You can avoid paying this by using a brokerage account to build your own portfolio, which is what we dive into next. For the vast majority of beginning investors, however, that’s a lot of additional work, so a robo-advisor fees may seem cheap to avoid the responsibility.
5. Start investing in the stock market with little money
Investing in the ‘stock market’ doesn’t just mean researching and buying your favorite individual stocks. It can also mean buying index funds or mutual funds.
Index funds and mutual funds are “baskets” of stocks where your small investment can buy a piece of the whole. Index funds follow an index – such as the S&P 500 – and include the same companies in the same proportions as the index it’s following. They are passively managed, sometimes even managed by a computer, that simply follows the index. Therefore the management fees are typically quite low.
Mutual funds are also groups of stocks that you can buy into but they are actively managed and rather than following an index, they follow a set of objectives set forth by the company. For example, the fund may only invest in growth companies. Or perhaps income is the objective so it will only invest in dividend stocks.
Of course, you can also invest in individual stocks. There are increasing numbers of options that have swung open doors to a new generation of investors — letting you get started with as little as $1 without routine commissions to buy or sell.
The Robinhood app changed the industry forever by bringing commission-free stock trading to the masses. They have been so successful they’ve disrupted the entire investing industry and forced all long-time brokers to follow suit and drop trading commissions.
Robinhood is a popular stock trading and investing app that offers zero-commission trades on thousands of investments, including stocks, starting with as little as $1.
With beginner-friendly features and easy-to-read charts, Robinhood is great for new investors and there's advanced features even more seasoned investors can appreciate.
- Commission-free trading
- Easy to use, well-displayed dashboard
- No obligation or minimum account balance
- No bonds or mutual funds
Plus the ability to invest in companies with fractional/partial shares is a complete game-changer with investing, especially you’re starting out with little money.
With fractional shares, it means you can diversify your portfolio even more while saving money. Instead of investing in a full share, you can buy a fraction of a share. If you want to invest in a stock that trades for a high price, like say Chipotle, you can do so for a few dollars. Basically, instead of buying a burrito, take the cost of a burrito and invest it. You no longer have to match the full price of a share or hope a stock splits to start investing in your favorite companies.
» MORE: Best online brokerage accounts for beginners
6. Dip your toe in the real estate market
Believe it or not, you no longer need a lot of money (or even good credit) to invest in real estate. A new category of investment known as “real estate crowdfunding” and similar spawn-offs make it possible to own fractional shares of large commercial or other types of properties without the headache of being a landlord.
Crowdfunded real estate investments typically require larger minimum investments. They’re also riskier investments because you may be investing in a single property rather than a diversified portfolio of hundreds of individual investments.
The upside is owning a piece of a real physical asset that’s not necessarily correlated with the stock market.
As with robo-advisors, investing in real estate via a crowdfunding platform carries costs that you wouldn’t pay if you bought a building yourself. But here, the advantages are obvious: You share the cost and risk with other investors and you have no responsibility for maintaining the property or even doing the paperwork.
It’s not recommended to lay all your money on these types platforms or investment opportunities and some are only open to accredited investors, but they do make an intriguing alternative investment.
» MORE: Best real estate investment apps
7. Invest in mutual funds or ETFs
Mutual funds are investment securities that allow you to invest in a portfolio of stocks and bonds with a single transaction, making them perfect for new investors.
The trouble is many mutual fund companies require initial minimum investments of between $500 and $3,000. If you’re a first-time investor with little money to invest, those minimums can be out of reach. But some mutual fund companies will waive the account minimums with automatic investments or require no minimum.
Exchange-traded funds (ETFs) hold stocks, bonds, or commodities just like a mutual funds, presenting similar exposure and structure, but they tend to be more liquid since they trade like stocks throughout the day. Plus, ETFs do not require a minimum initial investment and offer more order types.
What are the best investment strategies for beginners?
There are many different investment strategies out there. You could read material from Warren Buffett, Dave Ramsey, and other personal finance experts who will all have different beliefs on investing and managing your money. There’s a wealth of investment tools and resources out there providing a pathway of knowledge for you to digest.
Before you begin, here are a few things to consider with all investing strategies.
1. Understand your goals and risk tolerance first
What are your investment objectives? Here are some goals you may be pursuing:
- Saving up for early retirement.
- Investing in real estate so that you can become a landlord.
- Investing in the stock market so you can buy that dream home in 10, 15 years.
And so on. The good news is that investing your money is a personal decision, so no goal is the wrong goal.
Here are a few helpful tips to keep in mind if you’re investing as a beginner:
- Money that you need within five years should not be invested in the stock market – whether that is individual stocks, index funds, or mutual funds. There’s plenty of better places to store your short-term savings.
- Money that you’ll need before retirement should not be in a 401(k) or IRA.
- When saving for retirement, get the employer 401(k) match, then max out your IRA, then go back to max out your 401(k). Anything after that should be in a taxable brokerage account and/or other investments, like real estate or alternatives through accessible platforms like Public.
2. There’s no such thing as a best investment for everyone
I have friends who refuse to even think about cryptocurrency. Then I have other friends who only invest in cryptocurrency. I know people who swear by real estate investing while my investing friends obsessed with dividend stocks are terrified of getting into the real estate investing space.
It’s important to remember that there are many different investment strategies and there’s no such thing as a one-size-fits-all solution. You may find that investing your money with the a robo-advisor over a broker works best for you, for example.
Your own personal risk tolerance and financial situation will be big factors in your investment decisions.
If you feel like you need investment advice you can speak to a financial advisor. However, that will likely cost some money – but it might be worth the cost if it gives the confidence to get started. A financial advisor can create a plan with your personal financial situation in mind.
Look for an advisor who is a Certified Financial Planner (CFP). A lot of advisors have minimum investment requirements before they will take you as a client. However, you can hire a “fee only” financial advisor who will charge you a flat fee. These advisors are more likely to work with lower-balance clients as they don’t get paid based on a percentage of your investment portfolio.
3. Different goals require different investments
One thing you have to accept as a new investor is that you set different investment goals using different investment strategies for every stage of life.
For example, when you first get out of college, you may want to focus on just starting to invest with a minimum amount as you tackle your student loans and build up an emergency fund.
Conventional wisdom is it makes sense to be a more aggressive investor early in life while becoming more conservative in strategy as retirement approaches.
4. Learn to be patient
Warren Buffett is known a number of quotes where he compares the stock market to a money transferring device from the impatient to the patient. And that’s true.
What this means is that many beginner investors will lose money because they’re too impatient or because they’re looking to make a quick buck from investing. Investors with the stomach and the patience ultimately benefit.
» MORE: Investment strategies for building your portfolio
Common mistakes to avoid when investing
When some people first get into investing, they just want to get rich quick. I can relate because I read a number of personal finance books and blogs about that very topic when I was a new investor. I wanted to find the secret sauce. But after wasting six months on various get-rich-quick schemes, I accepted that I just needed to focus on investing my money the right way.
There are plenty of investing mistakes that beginners typically make — mistakes that could cost you thousands of dollars and discourage you from investing in the future (thus costing you much more). We want you to learn from others and avoid these mistakes from the beginning of your investing journey.
Here are common mistakes investing mistakes to avoid:
- Not investing early enough. The worst thing that you could do is put off investing because you’re afraid or you only have a small amount of money. You’ll want time to be on your side when it comes to compound interest.
- Trying to time the market. There’s an old adage that time in the market is more important than timing the market. It’ll always be right. The market goes up over time — take advantage of that over trying to profit over trends.
- Getting involved in shady investments. As tempting as it is to go after those promises of high returns with apparent low risks, research opportunities thoroughly and watch out out who or what you trust your money with.
- Putting all your eggs in one basket. It’s crucial that you diversify your portfolio so that you don’t end up relying for one investment to pay off. Don’t rely on exceptions to this and go all-in.
- Panicking at the first sight of volatility. You have to understand that ups and downs in the market are normal. When the market drops, it’s important that you keep level so that you don’t end up selling at the bottom.
- Selling when an investment drops. You don’t lose money until you sell. Too many rookie investors will start selling off their assets when they begin to see red. You have to be patient and consider short-term fluctuations unless an original investing thesis changes.
- Taking advice from random strangers. There’s an abundance of self-proclaimed gurus out there who want to give you unsolicited stock picks. You should avoid these people, courses and ads at all costs. If you do want (solicited) stock picks, consider a reputable subscription service like The Motley Fool Stock Advisor.
- Not understanding what you’re investing in. Before proceeding with an investment strategy, you have to know exactly what you’re putting your money into and what it entails.
At the end of the day, you want to start investing the right way (and as soon as possible) so that your money can begin to work for you now. And, if you make any of these common investing mistakes, then take it as a lesson and start investing the right way from that point forward. No one’s perfect.
Summary
There are plenty of ways to start investing with little money, including utilizing online and app-based investment accounts that make it easier than ever to invest with just a few bucks without commissions.
All you have to do is start somewhere, even if you only have only a small amount of money to invest. You’ll start to build experience and down the line your future self will be happy you did without waiting any longer.
