How much are you comfortable investing each and every month? Hint: Set yourself up for success by not committing more than you know you'll be able to contribute.
There are a lot of discount brokerage firms, online and off. Each offer different levels of customer service. The key here is to look for a reputable brokerage firm that offers special pricing for small accounts and no minimums to get started. The downside is there isn't a lot of human interaction or hand holding. However, when your investing strategy is as simple and straightforward as the one I'm about to suggest, you may not need a whole lot of advice. In that case, brokerages like TD Ameritrade, Betterment and Sharebuilder are good options for starting small.
Pay taxes now or later? It's your choice. Brokerage firms offer different types of investment accounts. What's better, to open a new investment account and pay taxes at the time you have a profit, or opt for one of several different types of Individual Retirement Accounts (IRAs) that let you pay those taxes in the future? Maybe you're already enrolled in your employer's or spouse's 401K at work. By all means, take full advantage of the tax breaks they offer. In addition, you can invest in your own to turbocharge your savings. Once you've established your own brokerage account, you'll be able to start investing.
There are literally tens of thousands of investment ideas but I'm going to cut right to the chase. A good place to start when you're investing small is with stock market index funds. Index funds are very low-cost mutual funds that let you buy into a wide variety of stocks with as little as $50 or $100 a month. You can even put your money to work in one fund that invests in every stock listed in the S&P 500 index. That means you own fractional shares in all 500 of America's biggest and most profitable companies like Google, Apple and Amazon. The value of your investment will move in lockstep with the overall stock market. Think of it this way: instead of betting on just one horse in the race, index investing lets you put your money on all the horses. Even Warren Buffett says index investing is the smartest approach for anyone just getting started because it's a sure way to diversify your investment. That means minimizing the risk of putting too much money in any one company's stock and then losing money if that company gets into trouble. Even if Apple's your favorite company, it's much safer to own more than just Apple's stock. Fees on index funds tend to be negligible so that means more of your money is working for you, and it's easy to put this investment on autopilot. All you have to do is invest consistently over time, month in, month out. Whatever amount you decide, like that $50 or $100 a month, it can be deducted from your checking account and automatically invested directly into a stock index fund.
Keep up the contributions knowing that your $50 a month invested over the next 40 years can become a small fortune by the time you're ready to retire. Index fund investing can become second nature, just like breathing, so that investing in the stock market becomes a consistent, painless habit. This simple practice over the long run is how you can turn your small investments into real wealth.
In my next article, I'll share a professional investing strategy that works great for index funds and will take the fear out of investing.
Pam Krueger is co-anchor and creator of the MoneyTrack series on PBS. With a passion for personal investing, Pam worked as a stockbroker before leaving her "day job" for TV. She serves on the board of the California Jump$tart Coalition, promoting financial literacy among high school and grade school students. Keep up with Pam at Pamkrueger.com.
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