How to Start Investing with Little Money

Investing is a crucial step toward building long-term financial security, but many people are under the impression that they need a large sum of money to get started. The reality is that you can begin investing even with limited funds. One of the first steps to start investing with little money is to set clear financial goals and determine your risk tolerance. Understanding how much you can afford to invest and what level of risk you are comfortable with will help guide your investment decisions.

Let's find out how to start investing with little money.

Why Investing Is Important?

Investing allows you to grow your wealth over time. Even small amounts of money can generate significant returns if invested wisely. By wisely, most financial advisers mean you should assess your risk and invest across asset classes.

Don’t put all your money in one stock or one cryptocurrency. Instead, speak with a financial adviser to make a personal investment plan, or consider investing in a mix of index-tracking funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), bonds and saving in a high-yield savings account or money market account.

By investing, you have the opportunity to earn passive income, compound your returns and protect your money against inflation. It helps you to diversify your financial portfolio and achieve your long-term financial goals.

For example, $1 invested today which earns an average annual return of 7% would be worth nearly $15 in 40 years. If, instead of $1, you chose to invest $100 a month, that money could grow to over $114,000 in 30 years. If, instead of 7%, you were to earn 11% — the average return of the S&P 500 over the last 50 years — you’d have over $240,000 after 30 years. That’s the potential power of investing for the long term and compound interest growth.

What to Consider Before You Start Investing

If you are ready to start investing, weigh the options to build a personalized investment portfolio. Here are key considerations to understand.

Financial Situation

Everyone’s financial situation is unique. Evaluate your overall financial situation, including your income, expenses, debts and emergency fund. You may be able to identify areas of expense where you could cut back to start investing. And paying off high-interest debt is important, too. However, your first priority should be an emergency fund so that unexpected expenses like a medical visit or car breakdown don’t force you into debt. Once you’ve built an emergency fund in a high-yield savings account or other bank account and reduced debt, it’s time to consider investing.

It's important to have a solid financial foundation before investing, as unexpected expenses or financial difficulties could impact your ability to meet your investment goals and harm your overall financial health.

Investing Goals

Define your investment goals, including whether they are short-term or long-term. This process will help you determine the appropriate investment strategy and the level of risk you are willing to take. Most beginner investors will choose a long-term strategy to allow for long-term compounded growth.

Don’t try to time the market or pick individual stocks unless you have extensive expertise in that area. Instead, consider speaking with a financial adviser or using investment basics like dollar-cost-averaging with a buy-and-hold strategy for index funds, REITs, ETFs or other investments.

Investment Knowledge

Assess your level of investment knowledge and expertise and then build on it. Start by understanding the underlying assets, historical performance, management fees and associated risks and stock market risks. Learn the fees and expenses associated with different investment options, including brokerage fees on trades. Learn about the liquidity of your investments and how easily you can access your money if needed.

While many stocks are liquid, investing money you’ll need in the next one to two years is generally not advisable, as you may be forced to withdraw it during a market downturn. For most people, keeping those funds with your emergency fund is more practical. Invest the money you won’t need soon.

Risk Tolerance

Understand your risk tolerance and how much risk you will take with your investment. Investments can fluctuate in value and being comfortable with potential losses is important. Risk is usually quantified as conservative, moderate and aggressive.

Young investors often choose a more aggressive approach to building funds quickly, and many investors will shift to a more conservative approach as they approach retirement age. However, those decisions can vary widely, and assessing your individual risk is important.

10 Ways to Start Investing with Little Money

Investing uses the power of long-term growth and compound returns to create greater wealth. Here are 10 ways to start investing with little money ranging from no-risk (savings accounts) to robo advisers, REITs, ETFs or low-cost brokerage accounts. Here’s how to get started.

1. Open a High-Interest Savings Account

A high-interest savings account is a type of savings account that offers higher interest rates. While these rates can be less competitive compared to other potential investment returns, there’s no risk of losing the money, and you can withdraw it anytime. Some banks require that you maintain a minimum account balance. Some will also limit withdrawals to six per month.

A high-yield savings account is a great choice if you’re working to save up an emergency fund or need a secure place to store money for savings goals like a house downpayment. Savings accounts are insured up to $250,000, offering a risk-free investment solution that still takes advantage of compound interest.

2. Choose a Certificate of Deposits

A certificate of deposit (CD) is issued by banks and credit unions in the U.S. with specific terms for maturity. CDs are insured up to $250,000 by the federal government, offer excellent security with growth possibilities and pay more favorable interest rates than traditional savings accounts. Generally, the longer the maturity, the higher the interest rates offered.

You'll have to pay penalties and fees if you withdraw funds before the CD matures. That’s why you should purchase the CD for a term until you expect you’ll need the funds. Maturity lengths range from six months to 10 years from when the CD account is open. You can shop around for CDs with favorable terms and interest rates for your goals.

3. Take Advantage of Retirement Plans

Retirement plans offered by employers are usually 401(k) plans. Many employers also offer some form of 401(k) match, in which they will match up to a certain percentage of your 401(k) contributions. After you deposit funds in a 401(k), you can invest those funds into the target funds, index-tracking funds or mutual funds offered by the company’s plan.

You can contribute pre-tax dollars to the 401(k), and those funds will grow tax-free. You’ll need to pay the applicable income tax when you withdraw funds after retirement. If you withdraw funds before age 59 ½, you’ll have to pay a penalty of 10% plus applicable taxes.

Consider also using other individual retirement accounts (IRAs). A traditional IRA functions like a 401(k). You deposit pre-tax dollars that you hope will grow over time, and you pay taxes when you withdraw from the account. You’ll face a penalty of 10% if you withdraw funds before age 59 ½.

A Roth IRA allows you to deposit after-tax dollars, which grow tax-free. You don’t have to pay taxes when you withdraw funds. In addition, you may withdraw Roth IRA contributions penalty-free if you need those funds for something else. You also don’t have to take required disbursements at retirement, potentially allowing those funds to continue to grow.

4. Open Low-Cost Brokerage Accounts

Low-cost brokerage accounts are a way to invest in stocks, mutual funds, ETFs or other investment products with low trade or management costs. If each time you purchase a position or make a trade, you’re charged a fee, some of the investment returns can be lost in fees.

Low-cost brokerage accounts offer no-cost or low-cost trades on certain asset classes, like mutual funds, ETFs or index funds. For someone starting to invest with little money, prioritizing investment accounts without fees is essential. Remember that you’ll get more tax benefits from a 401(k) or Roth IRA, so focus on maxing out those with low-cost brokerage options first. Check out the best stocks for beginners with little money to get started.

5. Consider Low-Initial-Investment Mutual Funds

Mutual funds are actively managed investment funds. A mutual fund collects the money of many investors to purchase securities. While some investment funds have a high minimum investment, low-initial-investment mutual funds allow you to start investing with little money.

When researching mutual funds, look at the fund’s historical performance, the current fund manager’s history and the fund’s current positions to assess whether it is a good fit for your goals.

6. Get Help from Robo-Advisers

Robo-advisers are online applications or AI that provide automated investing and financial advice and services. Robo-advisers can suggest trades or manage your investment account for you. To start researching, check out some of the best robo-advisers here.

7. Test the Waters in Real Estate Investing

It’s possible to invest in the real estate market even with just a little money through crowdfunding or REITs. REITs buy, sell and manage real estate properties. They must distribute at least 90% of income annually to shareholders through dividends.

In addition to the potential for strong market returns, REITs pay regular dividends, making them a satisfying way to invest a little money and get some back regularly through dividend payments. Find some of the best REITs, including REITs that allow you to invest a small amount.

Crowdfunding follows a similar principle, although you may invest in a single property or properties with a group of other investors. This type of investment carries greater risk, although also the possibility of strong returns.

8. Allocate Funds Toward Stablecoins on High-Interest-Rate Platforms

Stablecoins are cryptocurrencies that are pegged or tied to another financial instrument like a currency. With the rise in cryptocurrency investment and adoption, stablecoins offer the opportunity to invest a small amount of money in cryptocurrency with less risk than investing directly in cryptocurrencies.

Reliable platforms for high interest rates on stablecoins include Stargate, OKX, ZenGo and Nexo. Because stablecoins are tied to a currency or commodity like gold, they can offer more stability than other cryptocurrencies as a way to start investing in crypto. However, stablecoins can crash, so they carry more risk than money market accounts or CDs.

9. Participate in Peer-to-Peer Lending

Peer-to-peer (P2P) lending is a way for individuals to borrow directly from other individuals. Websites that facilitate P2P lending have grown significantly in recent years. If you choose to become a P2P lender or join crowdfunding, you could get better returns than cash savings. However, the default rates for P2P loans are much higher than traditional loans, which means the risk of losing the investment is also higher.

10. Spend Capital on Developing Your Own Business

Opening a business can be a highly rewarding investment in the long term. Even a modest initial investment in something you are passionate about and desire to transform into a business can have a significant impact. In addition to putting money into other investments, consider investing in yourself to build a business that can lead to greater wealth and passive income.

Creating Your Investing Plan

Anyone can be an investor with a little planning. Prioritize savings so you can invest a little each month, even while paying off student loans or sticking to a tight budget. Consider the investment options here as a starting point to build your unique investment strategy. Remember the basics: invest long-term, buy and hold, and diversify to reduce risk. Even a little money can grow over time and lead to greater investment opportunities.

Frequently Asked Questions