Since The Broke and Beautiful Life book release, I’ve received a slew of inspiring messages from readers taking hold of their financial lives and “breaking broke” towards a better financial future.
While walking one of these rockstar readers through the process of her retirement account set up however, I stumbled upon a slight snag… minimum balance requirements.
Having saved a significant chunk of change in savings before discovering the power of investing for myself, I hadn’t realized the hurdle of minimum brokerage balances. I just dumped my savings into a ROTH IRA and watched as it finally started enjoying some significant growth (instead of paltry monthly interest payments).
It was then that I realized the true value of investment growth – growth that couldn’t be achieved in checking, savings or even CDs. Growth that could actually outpace inflation thanks to a smart and diversified investment strategy.
The benefits of that kind of leverage had to be accessible to those who needed it most – those with limited earnings and without access to other options, like an employer sponsored 401k plan.
But minimums, even at discount brokerages, can start as high as $1,000 – and for those whose cost of living to monthly income margin is razor thin, waiting around to accumulate a lump sum before investing could mean missing out on real returns for quite some time.
So… Where do you start investing when you’re broke?
Side note: If you’re struggling to find cash to invest, check out How to Budget Without a Budget, and learn to prioritize financial goals so that they become as non-negotiable as your necessities.
What You Shouldn’t Do
Some newbie investors might be looking at a few stock symbols calculating how many shares they can get for their initial $50 or $200 contribution, but let me stop those musings there.
Let’s not forget two key tenets of basic investment strategy – smart and diversified.
Smart meaning low cost. Every time you purchase or sell individual shares of a stock you have to pay the brokerage a fee. The brokerage being the institution that purchases or sells the stock for you.
If you invest a small amount, let’s say $100, and you pay a fee of $5, you lose 5 percent of your investment right off the bat. You don’t want to be down 5 percent from the moment you buy in.
You also don’t want to leave yourself financially vulnerable by putting all your bets in one or two places, which is just what individual stock picking does.
Unless you’re a pro (and sometimes even then), you’re going to be better off investing your money in low-cost funds, like ETFs and index funds. With such funds, a minimal investment can get you a fully diversified portfolio across hundreds of stocks and bonds.
A Quick Investing Refresh
I want to pause here for a little investing 101 refresh, just in case any of this is beginning to sound like confusing jargon.
If you’re already feeling confident in your foundational investment knowledge and just looking to break through the barrier of too few funds to invest, feel free to skip down to the next section. If not, read on.
To set up your investment foundation, you’ll want to start with the essentials – that is, your retirement accounts.
You can do this either by participating in your employer-sponsored retirement plan, opening an individual retirement account or both.
If you need to open an individual retirement account, you can do that through a discount brokerage or robo-advisor – I’ll give you my low-cost suggestions on those later.
Once you’ve set up your retirement account(s), it’s time to choose the actual investments that will go into them. That’s right, a 401k, IRA, ROTH IRA or any other kind of retirement account is just a holding place for all the investments you’ll choose to fill it.
This is where your smart, diversified portfolio comes in.
I like to keep things simple by investing in a few index funds, index funds being big bundle of stocks from different companies that follow a given index like the S&P 500. Index funds are great investment vehicles because they’re low cost and provide instant diversification.
If I’ve already lost you, no worries, you can still begin investing by taking advantage of tools that make the process even simpler– robo-advisors.
At robo-advisor Betterment, for example, you simply go to the website, input your age and income, and select your goal. They then pick a plan that’s best suited to your objectives. You can also do this for non-retirement account investments too.
That’s right, someday when you’re not broke, you can (and should) invest to grow your wealth to meet financial goals beyond retirement – or rather, before retirement.
Money invested in retirement accounts is there for the long haul, age 59.5 to be exact, and you can only invest in those accounts up to their given limits each year. If you get to the point of maxing out your retirement investments and/or wanting to invest for near-er term goals, like a housing down payment 7 years down the line or an around the world trip in 15 years, you can use the same simple and smart strategy of index fund investing through discount brokerages or robo-advisement platforms to grow that wealth outside the shell of your chosen retirement savings vehicles (IRAs, 401ks, etc.)
Okay, so that’s the quick and dirty investing 101 recap. Back to the matter at hand…
Investing When You’re Broke
One of my favorite discount brokerages for purchasing index funds is Vanguard. The trouble is, most funds at Vanguard, and many brokerages, have a minimum initial investment requirement of $3,000. The Vanguard Target Retirement Funds and Vanguard STAR Fund can be opened with a $1,000 investment, but even then, $1,000 can take a while to accumulate when you’re broke.
There’s always the option of setting aside savings in a high yield online savings account until you reach the required opening minimum, but with new innovations in financial technology and increasingly high competition among brokerages, I set out to find alternatives.
After all, the most important step in any successful investing strategy is getting started.
If you keep waiting around until you feel you finally have “enough” to begin, you’ll be missing out on your greatest asset in your investment arsenal – time.
Here are a number of services to help you start investing now, wherever you’re at, with whatever money you have available.
Where to Start Investing When You’re Broke…
- Employer Sponsored Retirement Plans. As a freelancer, I don’t have access to an employer sponsored retirement plan like a 401k, but I’d be ALL over that if I did. I’m actually super jealous of everyone enjoys this perk, particularly those of you who have employers that match your 401k contributions in some capacity. That is FREE money! Take advantage of it!
Now I obviously don’t know the ins and outs of your particular 401k plan, but your HR rep does. Don’t hesitate to contact them to see how you can maximize your plan in a way that works with your budget.
- Betterment – Betterment is a robo-advisor. Newbie investors utilizing the Betterment platform not only benefit from no minimum balance requirements, but also, from a uniquely straightforward and simplified approach to investing for minimal cost.
If you want to automatically deposit money each month and have it properly invested without worrying about anything else, I highly recommend Betterment. It satisfies diversification through ETFs and allows you to adjust your risk level to suit your needs.
The goal-based tools and comprehensive online portal at Betterment make the entire investment process uniquely simple to understand – whether you’re building up your retirement savings or focusing on investment growth beyond your retirement foundation.
- TD Ameritrade – With no required account minimum, you can start investing at TD Ameritrade with whatever funds you have available – a huge perk for those looking to get into the investment growth game ASAP. With over 100 commission-free ETFs, TD Ameritrade is a great low-cost option.
TD also introduced a new “Education Center” in 2014. As you work on building your investment accounts, you can access the complete curriculum of online courses to become a more educated investor.
Stop Waiting – Start Investing
Investing has never been as accessible or low cost as it is today with the tools, technologies and platforms now available. Even if you’re broke, you can and should get in the game ASAP.
Investing is an essential ingredient in any wealth building strategy and getting started as soon as possible is the single best thing you can do.
Don’t get hung up on what you don’t have, whether it’s a large investment sum or the perfect investment strategy, just start by making the most of the smart, diversified and simple investment options available.