By Barbara O’Neill, Ph.D., CFP®, Rutgers Cooperative Extension, firstname.lastname@example.org
Many people mistakenly think that they need to have at least several thousand dollars to invest. This is simply not true. It is possible to invest on a shoestring, with small dollar amounts ($1,000 or less).
Even people with modest incomes can build wealth over time, and they don’t need a lot of money to get started. For example, they could open an investment account with money from accumulated savings or an income tax refund and then make smaller regular deposits (e.g., $50 or $100 per month).
Some investments can even be purchased in increments of $100 or less (e.g., $10 per paycheck invested in an employer retirement savings plan). Setting aside small amounts of money regularly and reducing household expenses to “find” money to invest are the keys to successful shoestring investing.
Below are six action steps to invest with small dollar amounts for service members:
- Make Tax-Deferred Deposits at Work- The Thrift Savings Plan (TSP) is the tax-deferred retirement savings plan for service members and federal government employees. Contributions are made as a percentage of basic pay via automatic payroll deductions. Other advantages are a federal income tax write-off for the plan contribution amount and tax-deferred growth of plan deposits and investment earnings.
- Buy Stocks on a Shoestring– Back in the day, stock investors often needed five-figure sums and a broker to buy 100 shares of several stocks to set up a diversified portfolio. This is no longer the case. Low-cost stock purchase options include investment clubs, dividend reinvestment plans (DRIPs), direct purchase plans or DPPs (where investors buy stock directly from a company), and various online investing platforms.
- Buy Bonds on Shoestring- All U.S. Treasury securities (i.e., bills, notes, and bonds) have $100 minimum deposits and $100 purchase increments. Specific details can be found on the Treasury Direct Other low-deposit, fixed-income investments include corporate bonds, zero-coupon bonds, and U.S. savings bonds. Series I bonds provide inflation protection, and series EE bonds pay interest based on current market rates.
- Buy Mutual Funds on a Shoestring– Initial minimum deposit amounts and minimums for subsequent deposits vary among mutual funds. If a mutual fund requires more than $1,000 to establish an account, it may still have lower minimums for IRAs and other retirement plans, minor’s accounts, and automatic investment plans where investors make regular deposits on a regular schedule (e.g., $100 per month).
- Collect Loose Change– Coins saved in some type of container add up over time and can provide “seed money” with which to make investment deposits. Better still, save $1 a day, plus coins (about $50 a month or $600 per year) or $2 a day, plus coins (about $80 a month or almost $1,000 per year). Ideally, use a clear jar or other type of container to see the investing seed money grow. Visibility provides motivation.
- Continue “Paying” an Expense- This strategy is powerful because it does not affect peoples’ cash flow or make them feel deprived. Simply continue making monthly “payments” as regular deposits to an investment plan after a loan or household expense ends. In other words, redirect the money from an expense to an investment. Examples include car loan payments, student loan payments, a mortgage, and child care.
For additional information about investing on a shoestring budget, review the archived Military Families Learning Network webinar, Investing with Small Dollar Amounts and its accompanying handouts, including presentation slides, an online resource list, and an investment risk tolerance quiz. Another free resource for beginning investors with small dollar amounts is Unit 8 (Investing Small Dollar Amounts) of the free online Cooperative Extension basic investing course, Investing For Your Future.