Investing is a fantastic way to help you grow your income to a sizeable amount of wealth. As long as you invest consistently and diversify your investments, you should be on a path to success.
A good way to invest a small amount of money is to purchase mutual funds, ETFs, index funds, and/or fractional shares. All of these investment vehicles have different pros and cons (which I’ll highlight below) and allow you to get skin in the game with small amounts of money. You can also buy individual stocks depending on how much money you have to invest.
Some stocks like Tesla and Amazon are well out of the reach of some investors just starting out with a small amount of money. At the time of writing this, Tesla stock is over $1,600 and Amazon is over $3,000.
Then you have companies like Ford and AT&T that are around $10 and easily affordable. These companies intentionally make their stocks affordable for everyday investors.
So if you’re asking the question of “what is a good way to invest a small amount of money”, most likely you’re just starting off. As you start getting your feet wet by investing, you’ll be investing maybe $50 to $100 every week or month.
It’s a great habit to build and one that you should do systematically. I personally think that everyone can be (and should be) an investor, and everyone has some amount of money to put away from $10 to $100, it’s about your mindset.
The goal is to make it a routine, and the trouble comes in when you start getting excited about your money growth and start investing money that you need.
Always invest money that you don’t need for the next few months, I keep a mindset of not needing the money I invest for a few years. Stock market gains can be exciting and addicting, but don’t add any money that you’ll need for home bills or everyday living.
Instead, as you start adding a little bit of money over time, push your investing muscles to invest 5% more every few months, take it easy because it’s a long game.
This way, you’ll have a strong mindset to not only continually invest over a long period of time to build up your wealth but also keep the money you need and the money you can invest separately.
Small money investing option – Mutual Funds
Mutual funds are extremely popular in that you can buy into a fund with a small amount of money, say $100, and get a small piece of many many stocks.
Think of mutual funds (and the other options I list after) as a type of “briefcase”. In it, you can have different things to invest in. There are mutual funds for stocks, some for bonds, and some that have a different combination of both stocks and bonds.
I love the fund analyzer tool on FINRA where I can find different mutual funds, and then pick 2-3 to compare head-to-head.
When picking a mutual fund, I usually have 2 primary things I look at.
First is the composition of the mutual fund, which just means to see what the fund is about and what stocks are in it. On one hand, you can buy a technology mutual fund, and on the other hand, you can buy agriculture mutual funds. There are more mutual funds than stocks in the market, everyone’s making their own “blend”. Find your blend and stick with it. I love tech stocks.
Next is to compare the mutual fund fees. Unlike buying individual stocks, mutual funds come with fees that you pay on a yearly basis. To keep this super simple, you never want to pay anything more than a 1% yearly fee, and ideally want the lowest fees possible.
Vanguard is a super popular company that has mutual funds for as low as 0.04%, which is amazing. Keep more of the money you invest, and let it compound stronger and stronger over the years.
Small money investing option – ETFs
Exchange-traded funds, ETFs for short, are mutual funds that are traded constantly whenever the stock market is open.
With a mutual fund, you can buy in at 10 am or 2 pm, you’ll still be buying in at the end of the daily value of the fund. If you want to get out, your total return per share would be the end of the daily value.
With an ETF, you can buy in and out actively during regular market trading hours. The benefit of this is if you want more liquidity with your money in the beginning. As you’re starting to invest and starting with less money, you might also be building up savings on the side. If you ever need the money more immediately, to be wired the same day to your account, an ETF might suit you better.
In the long run, as you invest more and more money, I would say that it shouldn’t matter to you if you get an ETF or mutual fund, as your goal would be to keep it growing for a long time.
You’ll also have to pay a fee to buy into an ETF, just like you would with a mutual fund.
The main takeaway here is that an ETF is just like a mutual fund, with the one difference that you can actively buy and sell an ETF during market trading hours.
Small money investing option – Index funds
Index funds share very similar nature to mutual funds and ETFs, in that you’re buying 1 or more shares of a fund that holds many different stocks. Each index fund has its own goal, so you’d buy the one that fits your goal the best.
There are 2 big takeaways for index funds that you’ll want to remember.
The first is that index funds are not comprised of a unique formula of different handpicked stocks, instead, the aim is to copycat an index. The technical term is that index funds “track an underlying market index”, but I wanted to simplify that for you.
Think of the S&P500, it holds the 500 biggest US-based companies. You can buy an index fund like VFINX or the popular SPY to basically copycat the entire S&P500 market by buying just 1 fund.
The benefit of this, which leads me to the second takeaway, is that there’s not a whole lot of thinking by the fund manager to find unique stock combinations, he or she is just copying an index. And because of that, the fees to own an index fund are extremely low compared to mutual funds.
The new kid on the block, fractional shares are definitely appealing to the new investors who have modest starting money.
With a fractional share, you’re buying a fraction of 1 stock of a company.
If Tesla’s current $1600+ stock price for 1 stock is too much for you, you can buy a tiny fraction of it for however much you put in, whether its $5 or $50.
However much you invest, will buy that much of a fraction of the stock. It’s pretty awesome and appealing for sure.
When you buy an index fund, ETF, or mutual fund, you can get good returns but pay a fee for all of them.
With a fractional share, the appeal is that you can buy a single stock that you want to invest in, at the price that you can afford, and have no fees.
You could also potentially get much higher returns than buying funds because with a fund there are a lot of high performing companies and some that are lower, which bring down the overall returns.
If you just bought fractional shares of Amazon, Microsoft, or Tesla (to name a few) this year, your return would have been way more than if you bought a safer mutual fund like VTSAX for long term growth.
With high returns can also come high declines too, but if I were a new investor with $50 or $100 a month to invest, I might start with fractional shares and move up to mutual funds as I can invest more on a monthly basis.
I hope you found some good ways to invest a small amount of your money. There is no shortage of opportunity now to buy into great companies, whether it’s through a mutual fund or a fractional share.
The first goal in your mind should be to build a habit of investing money that you don’t need and doing it for the long run.
The second goal would be to do your own research to find great mutual funds, ETFs, index funds, or individual companies that you believe in and want to be a part-owner of.
The best time to invest was yesterday, the next best time is today. Get going and post any comments or questions below so I can help more.