How Much Money Do You Need To Start Investing?
A widespread misperception about investing is that it takes a sizable sum of money to get started. I’ve had friends tell me they think they need $10,000 to be able to craft a portfolio. Don’t get me wrong – diversification is key! But it does not require a ton of money.
If you ever believed you need a lot of money to get started with investing, you are not alone. A poll in 2018 showed that 46% of millennials think it takes $1,000 to start investing. Another 17% believe they need at least $10,000 to start. ¹
Here’s the truth: starting with $100 is better than not starting at all. Giving your investments time to work for you is much more critical.
If you only have a small amount to invest, it’s best to find a vehicle that can provide diversification. You can buy shares in a well-diversified basket of companies through a mutual fund or ETF.
Why I prefer ETFs over mutual funds.
- Mutual funds are expensive (especially actively-managed mutual funds), and they typically don’t perform better. Actively managed means that you are paying someone to “manage” the mutual fund and buy and sell stocks. Not only does the management fee cost you, the transaction fees of buying and selling stocks within the fund add up too.
- On the other hand, ETFs are a passive investment. They often outperform mutual funds, and they don’t charge fees to own.
How much does it take to start investing?
As an example, here are several ETFs that have a share price below $50:
- SPLG – SPDR Portolfio S&P 500
- VTIAX – Vanguard Total International Stock Index
- VTWAX – Vanguard Total World Stock Index Fund
- FZROX – Fidelity Total Market Index Fund
- FNILX – Fidelity Large Cap Index fund
Another option to consider: many brokerages now offer fractional shares. Instead of buying a minimum of 1 share, you are now able to own less than one share. If you are interested in owning fractional shares, look into:
- Charles Schwab ($5 minimum)
- Fidelity (as little as .001 of one share)
- M1 Finance ($1 minimum)
- Betterment (down to 1/1,000,000th of a share)
Are you dying to own Tesla (NASDAQ: TSLA) stock? One share of Tesla is over $600!
Why would you not buy fractional shares? With only a small amount to invest, having a well-diversified portfolio is going to be key. To achieve that aim, an ETF is likely a better route than buying fractions of individual shares.
Do I Have To Pay Trading Fees To Invest?
A challenge in the past that led to this misconception was that you had to pay commission fees (usually around $7 per trade, regardless of the size of the trade). This dynamic made it seem like it is not worthwhile to invest only $100 at a time if only $93 (93%) ended up going towards your investment, vs. investing $1,000 where $993 (99%) is invested after fees.
However, brokerages started doing away with fees on trades. Led by Charles Schwab’s move in 2019 to eliminate commissions on stock trading, many other brokerages had to follow suit to stay competitive. Trading small sums is more accessible than ever before.
Let’s Get Started Investing
The truth is that it does not take a lot of money to start investing. You don’t need to invest a lot to have a diversified portfolio, either. ETFs are an excellent option for those getting started that do not have a lot of money to invest. The key to growing your portfolio is to add to your holdings over time consistently.