How to get started investing without a lot of money

After I lost my butt (about $30,000 in the stock market) picking individual stocks (Yahoo, Cisco, RedHat, who knows what else) I got an education on how to invest. This was my turning point in investing from being a money moron to becoming a financial rock star.

It’s the same education I’ll share with you so you can get started investing – the right way.

When you finish this article you’ll be able to become an awesome investor in just 5 minutes.

Too often, people get the deer in headlights look when hearing about investing. In this article, I’m going to show you how to get started investing without a lot of money, and then forget about it until you retire. Investing should be simple and easy.

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The #1 most important rule of investing

Never invest in something because someone says to (including me!). That includes your cousin, your co-worker, the people next door, any investment advisor.

Get an education first. Gather information. Then invest in something you understand. If you don’t understand something, ask someone to explain it to you. If they don’t do a good job explaining it, ask again! Or go get the information somewhere else.

Sometimes when learning personal finance, you come across terms others take for granted. Like stock, or investment. If you don’t know what those are or how they work – ask.

When you finish this article if you have any questions about how get started investing, email me directly at [email protected]. I read all of my emails.

How to get started investing – Quick Start Guide

When you open up the package for an electronic gadget (cameras, DVD player, coffee maker) you usually have the choice of reading a quick start guide to get you up and running as fast as possible, or the giant thick user manual written in nine different languages.

If you’re like me, you toss the user manual aside and go for the quick start guide.

I’m going to give you the quick start guide for how to get started investing. But, I encourage you to read my entire investment guide, so you become an educated investor.

A smarter investor is a better investor.

My quick start guide is super simple and is only one step.

Your situation How to get started
I have a company 401(k) Start by putting 1 penny of every dollar (1%) of your paycheck into your company 401(k)
I don’t have a company 401(k) and I have less than $1,000 to invest Open a new Roth IRA with Betterment
I don’t have a company 401(k) and I have more than $1,000 to invest Open a new Roth IRA Vanguard Target Retirement Fund

How to get started investing – User’s Guide

In the rest of this guide, I’ll sort through the what’s and the why’s of getting started investing simply and quickly.

If you’re getting started, you don’t need to hear all the mumbo-jumbo about ETFs, DRIPS, direct purchase plans, blah blah blah. I get it – just get me started – right now.

The more options you learn about, the more confused you will become. I’m skipping the intermediate and advanced stuff. We’ll focus on stuff a high-school teenager would understand.

Investing in a 401(k)

First there is no better way to get started investing than with an employer’s 401(k) plan. If your budget is tight start out by investing just 1 penny of every dollar (1%).

If you can do that – you’re done. Quit reading and go sign up with your company.

What if I don’t have access to a 401(k) plan?

There’s a misconception about investing that you need huge wads of cash to get started.

You don’t.

I’m going to give you the easy-breezy way to get started investing even if you only have $50 to get started. Or $25. Or $10.

What you want to do is sign up for a Roth IRA.

What is a Roth IRA?

A Roth IRA (Individual Retirement Account) will let you invest up to $5,500 per year ($6,500 if you’re age 50 or older) in an account that grows tax-free. It’s called a Roth for short.

The fact that it’s growing tax-free is huge. Giant! Money that grows tax-free means you won’t have to pay any taxes on it when you start withdrawing from your account in retirement.

If you aren’t putting your money in a 401(k), you want to be putting your money into a Roth.

Where do you invest for a Roth?

I’ll give you my two best choices depending on how much money you have to get started.

Getting started if you have less than $1,000 to invest

If you have less than $1,000 to invest, check out Betterment.

Betterment is the largest automated investing service. They help people to better manage and grow their wealth through smarter technology for a fraction of the cost of traditional financial services.

Betterment has 90,000 customers with over $2 billion invested.

There is one huge reason I like Betterment and would recommend them to you as a first-time investor:

  1. Betterment only invests in Vanguard funds (which I love!)
  2. Betterment has very low investment management fees

With Betterment, you can set up an investment account with a $0 balance.

Can I really get started investing with $0?

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Yes! The caveat is you won’t make any money – but you can set up an account and ready yourself to start investing.

Betterment is a good choice for you to get started because they require no deposit to set up an account. There is also no minimum balance.

What are the benefits of Betterment?

  • No minimum investment
  • No minimum balance
  • Low maintenance fees to get started (0.15% to 0.35% annually)
  • Automated savings
  • Invest in Vanguard funds

Hey, if you want want an easy way to get into the stock market, Betterment has been called the ‘Apple of investing’.

Getting started if you have more than $1,000 to invest

If you have at least $1,000 to get started investing I have another other option I would recommend for you. Instead of using Betterment (which invests only in Vanguard funds) you can invest directly with Vanguard.

To invest in Vanguard, you need $1,000 to get started. To keep it simple you should go with a Vanguard Target Retirement Fund

When you sign up, you pick the year you want to retire: 2020, 2025, 2030, 2035, 2040, 2045, 2050, 2055. The year you pick determines the allocation of your investment money, between stock, bonds, and cash equivalents.

With a target retirement fund as you approach retirement, the investment firm shifts your investments to be more conservative.

Why? If the market tanks the day before you retire you don’t want to have to say to your boss ‘oops, I think I’d like to work for a few more years.’ A target retirement fund avoids that scenario.

The great thing is it does this for you automatically. Remember when I said you could set it and forget it?

  1. Create your account.
  2. Setup automatic investments.
  3. Wait for retirement.

What am I putting my money in?

This is where people’s eyes start to glaze over. It’s best explained by comparing your investment account to something you are already familiar with.

You have a bank account, right?

Let’s say you’re with Bank of America. At the bank, you can have different types of accounts:

  • checking account
  • savings account
  • or multiples of each

What do you keep in those accounts? Cash. Are you with me so far?

The investment company (Vanguard, Betterment) is like the bank (Bank of America). The investment company also has different types of accounts:

  • traditional investment account
  • Roth IRA
  • IRA

They take your money and buy investment funds.

What does the investment company keep in the accounts? The investment funds you bought.

Company Account Type What’s in the account
Bank of America Checking Cash
Savings Cash
Your employer 401(k) U.S. big company stocks
U.S. small company stocks
International stocks
Vanguard Roth IRA Vanguard Target Retirement Fund
Betterment Roth IRA Various Vanguard Funds

Does that make sense?

When you have a checking account, you put cash in it.

When you participate in your company’s 401(k), you buy one or more funds that are available. The funds you buy are held within the 401(k).

When you put money into a Roth, you’re putting your money into one or more funds. The funds you buy are held within the Roth IRA. The funds and the Roth are administered by the investment company.

What can I do to avoid losing money when the stock market goes down?

There is a common fear people have that keeps people from investing. They worry about losing their money. There are a lot of horror stories you hear about when a stock market crash happens.

What you don’t hear about are the investors who keep investing and ride out the downturn. They turn a losing situation into a winning situation.

And the best part is for you when you choose any of the investment options I described, you will be a winner.

I explain how in my in-depth article ‘what can I do to avoid losing money when the stock market goes down?’

Do you have 5 minutes to start investing?

The bottom line is you should be in charge of your money.

If you’ve never invested a dollar in your life, wouldn’t it be great if at the end of today you could call yourself an investor?

What’s most important is to just get started. Do something. And do something today.

Procrastination is a retirement killer.

In five minutes, you can be an investor and start building up your retirement fund.

Do you have a question on getting started investing?  Please contact me.  

Disclaimer: I do not want any conflict-of-interest in the products I refer people to. I receive no compensation, advertising, kickbacks, or money from any of the companies and services mentioned. Vanguard gave me a cupcake once at a conference, and for that I thank them.
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