Socking away money to invest is a difficult process for most people. There are many reasons that cause hesitation: figuring out the unnecessarily complicated investment jargon, having to make a slew of decisions before you even begin investing money and getting over the natural tendency to be overly risk-averse. While these are all legitimate obstacles to investing, another often cited reason is people’s perceived incapacity to invest.
Many people believe that they aren’t in an adequate financial position to invest, and that any investing they do will be relatively meaningless in the long run. In reality, the vast majority of folks do have the capacity to invest, even if they aren’t high earners.
As long as you select the right discount broker with cheap commissions, invest in low-cost index funds, and make steady contributions to your accounts, a small amount every month can go a long way to achieving a successful financial future.
If you are investing on a tight budget, the most important thing to keep in mind are the fees. Contributing $20 per month is perfectly fine, but if you are paying $15 per month in trade commissions and various other expenses, the ability for that money to compound and grow over time is greatly reduced. Below are three important, low-cost ways to approach basic decisions that every beginning investor encounters.
1) Picking the Right Online Broker - Once you have made the decision to invest, one of the first things you have to select is your broker. With seemingly hundreds of options to choose from, how do you go about selecting the one that is the most appropriate for you? The first thing is to identify the proper criteria that you are evaluating potential brokers by. As an investor on a budget, you should be looking for cheap pricing, low account minimums, access to broad range of ETFs and mutual funds and decent usability. Full-service brokers are out of the question, as they often cost hundred of dollars per trade and require additional fees for the plethora of other services they provide. This leaves online discount brokers as the only reasonable options. Several brokers that offer great overall value include TD Amertirade, Scottrade and E-Trade. All these brokers charge less than $10 in commissions, all have fairly low account balance minimums ($500 for both TD Ameritrade and E-trade, $2,000 for Scottrade), and all offer a wide range of commission free ETFs and mutual funds.
2) Low-cost Index Funds – Many novice investors get bogged down when it comes to actually selecting their investments. Some people get intimidated by the overwhelming number of options and end up not paying all that much attention to what they invest in, or they get lost in the weeds and attempt to invest in stocks they believe will outperform the market. Both strategies are great ways to lose money. As an investor on a budget, you need to have a long-term time horizon, and be focused on low-cost funds that mirror an index like the S&P 500. A study Nerdwallet conducted earlier this year found that only 24 percent of professional investors beat the market over the past 10 years, and that index funds on average outperformed actively managed funds by 0.8 percent annually. In an environment where the majority of investors are incapable of beating the market, it is best to stick with index funds that have proven historically to provide market returns with extremely low fee loads.
3) Make Regular Contributions – Perhaps the most important practice for you to keep in mind as a thrifty investor is to make regular, scheduled contributions to your brokerage account (it makes the most sense to do this monthly). This strategy is called dollar-cost averaging, and has several important benefits. From a practical standpoint, it is far more feasible for you to make small, regular contributions as opposed to one lump sum amount. Also, you don’t want all your investments to be exposed to the exact same buying conditions – by investing in regular intervals, sometimes you will be buying in a frothy market and other times you will be buying when the market is down. But because you buy more shares in a down market and fewer shares in a more expensive market, over time, you will achieve a lower overall purchase cost for your investments.
While there are many perfectly legitimate reasons to prevent you from investing, your financial ability should not be one of them. Even investing as little as $10 a month can go a long way when it is done regularly and compounded over time.
Joseph Egoian is an investment writer at NerdWallet, a site dedicated to helping consumers learn how to manage their money, whether it’s to help them find the best credit card for their needs, or find the right online brokerage account.