5 ways to start investing with less than $500

LAST REVIEWED Apr 28 2020 9 MIN READ

By The Human Interest Team

A small investor will never become a wealthy investor without putting that first dollar into the markets! There are many excuses not to invest; you don’t have enough money, you don’t know where to begin, you’re scared, etc. Yet, if you have just $500, or even less, then you can start investing today.

Below are five easy ways to start investing with less than $500.

1. Invest now in your workplace 401(k)

Several years ago, I injured my foot and was sent to physical therapy. As the conversation turned to my physical therapist’s 401(k), he mentioned that the employer will match part of his 401(k) contribution, yet he hadn’t yet enrolled in the plan. He’s not alone in procrastinating his retirement planning.

It’s common for new and not-so-new employees to avoid investing in the workplace investment account. You might consider it “one more thing to do” on an already busy schedule. Or, you may feel unqualified to choose the “right” investments. (Here’s some help with that!: How to Choose the Funds in My 401(k))

Yet, investing in your 401(k) is the best way to dip your toe into the investing waters, and many employers match a proportion of your investment contribution. If you earn $40,000 per year and commit to 3% to a 401(k) contribution, you’ll divert just $100 per month into your retirement account. And if your employer matches, that’s another free $100 per month.

After one year, your investment account is worth $2,400 (more or less) depending upon how the investment markets perform that year. Now, imagine you continue this small investment, from age 25 until age 55 or for 30 years. If you invest very conservatively in several stock and bond index funds that earn 6.5% annually, at age 55, your 401(k) will be worth $204,900. Not bad for a $100 per month (plus $100 employer matching) investment.

Read about a 401(k) Robo-Advisor that checks all the boxes>>>

2. Auto-invest: From bank to brokerage account

In case you hadn’t noticed, automating investing is the way to go and very popular nowadays, given recent advancements in technology. By setting your investing on auto-pilot, you’re more likely to keep it up. Otherwise, it’s too easy to find something to spend your money on.

Again, this one requires an initial action. Yet, after setting up the account fund transfers and choosing the investment or investments, you can forget about it and begin to build wealth with less than $500.

Here’s how it works. You decide on a monthly amount to invest. Start small! You can increase the amount as your income increases. Next, choose an investment fund or funds for your cash contribution and the money is automatically invested every month. For newbies, choose from low-fee index funds such as:

  • Schwab Total Stock Market Index Fund (SWTSX), with a low 0.09% annual expense ratio

  • Schwab International Index Fund (SWISX), with a low 0.19% annual expense ratio

  • Vanguard Total Bond Market Index Fund (VBMFX) with a low 0.16% annual expense ratio

Schwab offers the advantage of requiring only a $100 minimum amount to start an automatic investment program.

You may be surprised to find that once the money is out of your account, you learn to make do living on less.

3. Robo-advisors are perfect for beginning investors

A robo-advisor is an automated platform that optimizes your investing. You answer a short risk and goals questionnaire and then the platform creates a diversified investment portfolio for you. Some robo-advisors require high minimum investments to get in the door. Others have very low investment minimums.

By using an automated robo-advisor, you’re assured that your investment dollars are regularly directed to the best return, lowest risk investments, in line with your own personal risk comfort level.

Here are a few robo-advisors with low minimum investment amounts:

Additionally, with a robo-advisor, you can expect to pay an expense ratio or a small fee calculated as an annual percentage of assets under management (AUM) fee.

4. Pay off high-interest-rate debt

You probably weren’t expecting “pay off debt” as an investment. Yet, if you’re holding debt with average interest rates over 8%, you’re much better off to get rid of that debt, than to invest in the financial markets.

The S&P 500 stock market index, a proxy for the total U.S. market, returned 7.25% annually on average from 2006 through 2015. During the same period, the ten-year treasury bond yielded an annual average of 4.71% (source).

So, consider investing in a U.S. index fund and earning 7.25% per year while paying 10% interest, or more, on your consumer debt. Subtract 7.25 from 10 and you’re actually losing 2.75% on every dollar you invest while holding the high-interest-rate debt. And that’s why you must pay off your debt, before investing.

5. Choose low fee index funds to boost investment returns

Whether you’re starting to invest in your 401(k) plan, an online investment account, a robo-advisor, or your own Roth IRA, the types of investments you choose matter. Although it’s helpful to educate yourself about investing before diving in, there’s one thing you need to understand right now, no matter how small you start. Fees matter.

Read: How to Choose Funds in My 401(k) Fund>>>

Every mutual and exchange-traded fund charges a management fee or expense ratio. These fees range from 0.09% on up to 1.70% or more. Every cent that’s going to management, isn’t being invested for your future. Although all investors should care, it’s even more important for the small investor to choose low fee funds.

Low-fee, diversified index funds are well-known to beat most actively managed mutual funds. In fact, Vanguard illustrates that over 30 years, on an initial $10,000 investment, the difference between an 0.18% fee and a 1.01% annual fee is a whopping $12,057. It’s easy to grasp that part of the reason that low fee index funds out-perform, is that more of your money is going into the financial markets, not the fund manager’s pockets. Also, the individual investments within an index fund are bought and sold less frequently than those in actively managed funds, thus they don’t incur as many trading commissions.

So, if you’re short on cash and want to start investing for your future, don’t despair. Start your investment plan today, and know. that you’re on the right path for building wealth for your future. Just be patient and don’t flee when you see your investment value go up and down. Investing for the future requires consistency, discipline, and patience.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

Subscribe to our Retirement Roadmap newsletter

Retirement isn’t just a destination. It’s a journey, and we’re here to help you. Our newsletter delivers succinct and timely tips, reviewed by Financial Advisors, to help you navigate the path to financial independence.

By providing your email above or subscribing to our newsletter, you agree to our Privacy Policy. You also elect to receive communications from Human Interest.