Too many people – particularly young ones – wait too long to start investing. Their excuse? “I don’t have enough money.” The truth is, even if you only have $1,000 to spare, becoming an investor today is the best move you can make because it puts the power of interest compounding in your favor.
Let’s say you’re 25 and you want to retire when you’re 65. If you invest your $1,000 today and earn an annual rate of return of 7%, after 40 years your $1,000 will have turned into $14,974. On the other hand, if you invest your $1,000 when you turn 30, by the time you’re 65 you’ll only have $10,677.
If that seems like small potatoes to you, consider this: instead of a one-time investment of $1,000, let’s assume you invest $1,000 every year. If you begin when you are 25, you will have $214,610 by the time you are 65. Wait until you’re 30, and you’ll only have $148,913.
So what are you waiting for? Let’s take a look at five great ways to start investing today.
Your Company’s 401(k) Plan
If you have access to a company 401(k) program that offers a company match, you should think long and hard before putting your money (whether that’s just $1,000 or more) anywhere else but in that 401(k).
A company match is free money that could instantly turn your $1,000 into $2,000. To put that in perspective, if you just put that $1,000 in a tax-deferred account earning 7% a year, it would take it just over 10 years to turn into $2,000.
Now, you may be saying to yourself: ”Well, that’s great, but I have the $1,000 in my checking account and I can’t move it from there into my 401(k).” That’s okay. All you have to do is sign up to have $100 per month automatically withheld from your future paychecks and deposited into your 401(k). Then you can use the extra $1,000 you have in your checking account to make up any budget shortfall those monthly deposits may cause.
The best part is, because 401(k) contributions are not taxed, the hit to your paycheck will be smaller than your actual contribution. Someone in the 25% tax bracket, for example, would receive just $75 less per month while contributing $100 to their 401(k).
TreasuryDirect is your gateway to owning U.S. Treasuries. If you are looking for a conservative way to invest your $1,000, this is it. Plus, since your tax dollars fund the Treasury, you don’t have to pay any commissions or fees to buy or hold Treasuries.
Two of the most popular products individuals buy directly from the U.S. Treasury are I Savings Bonds and Treasury Inflation Protection Securities (TIPS), because both investments protect you from inflation.
You can buy I Savings Bonds in increments as low as $25, and you can buy TIPS in increments of $100. But don’t get carried away. Treasuries–especially those that protect against inflation–may be the safest way to invest, but their returns are typically lower than those you will find long-term in the stock market. So you probably only want a portion of your portfolio tied up in Treasuries.
Direct Stock Purchase Plan (DSPP) and Dividend Reinvestment Plan (DRP)
Direct Stock Purchase Plans (DSPPs) are stock purchase plans that enable you to buy shares–and fractional shares–of stock directly from the companies that issue it. Because you don’t have to open a brokerage account, there are no minimum initial investment requirements to worry about. Want to own shares of General Electric? You can buy them directly from the company. Want to own shares of Microsoft? You can buy them directly from the company.
Now, you won’t be dealing with the company per se, but rather with the transfer agent it has contracted with to handle the sale and distribution of its stock. While some transfer agents don’t charge you a dime, others do charge a small fee for every purchase you make, usually in the $1 to $2 range. Two of the major players in the transfer agent market are Computershare and BNY Mellon Shareowner Services. If you can’t find the stocks you are interested on one of these two sites, check the investor relations page on the company’s website to see if it offers a DSPP or DRP.
Dividend Reinvestment Plans (DRPs) are a lot like DSPPs, but they take things one step further by actually using your dividend payments to automatically buy more shares of the stock. This is really setting your investments on autopilot. All you have to do is set up an account with the company or its transfer agent, fund your account with enough money to make your initial purchase and then sit back and let the account administrator use reinvest your dividends.
Incremental Purchase Plan
Incremental purchase plans allow you to automatically buy shares–and fractional shares–of stocks, mutual funds and exchange-traded funds (ETFs) using a set amount of money each month. These plans typically have no account minimums and allow you to invest in small dollar increments.
The benefit here is that you don’t have to buy a full share of stock. You can buy a fraction of a share, which allows you to spread a smaller amount of money out across a larger pool of stocks. Of course, you can get this same benefit by buying a mutual fund or an ETF. But if you want to have more control over the specific shares you are holding, this may be the route for you.
The most popular incremental purchase plan provider is ShareBuilder.
IRA or Roth IRA at a Discount Broker
Even though you may only have $1,000 to get started with, you can still take a more traditional approach and open an Individual Retirement Account (IRA) or a Roth IRA at a discount broker.
It used to be that you couldn’t open a brokerage account unless you had $10,000 to $25,000 to invest. Those days are long gone. With the proliferation of online discount brokers like Scottrade, Trade Monster and Zecco, you have access to an incredible amount of investing tools and trading platforms.
Of course, if you put your money into an index fund, you won’t need all of these tools. But if you plan on being more aggressive with your little nest egg, you will have everything you need to analyze company fundamentals, stock charts and trade flow, right at your fingertips.