How can a poor college student, that doesn’t have $1000 on hand, start investing?
– A PTY reader
Your boat is my boat, my friend! It’s hard to scrape together enough money to put gas in my car – how can I save up enough to start investing and take advantage of sweet, sweet compound interest?
Should I Invest?
First things first, you’ve got to figure out if investing is a good idea for you right now. When we say “investing,” we mean “buying stocks and holding onto them over a long period of time.” With this in mind, ask yourself three questions before you start looking for ways to invest:
What’s my goal?
Since investing is so long term, you should really save it for goals that are 10+ years off. If your goal is shorter-term than that (say, a new car in five years or a down payment on a house), you should look into more conservative investments, such as bonds, CDs, and money market funds. If your goal is something like “retiring in something better than a shack,” then stock investments are your friends.
Could my money be put to better use?
It seems like investing is the best thing you could do with your money, right? But that’s not always true. If you have any debts with interest rates over 10%, you’re better off funneling your money into paying off your debt. Compound interest works both ways, so high interest rates on debts will only work against you.
Do I have enough savings?
Along the same lines as above, your money might be put to better use preventing debt. This means having an emergency fund and a “getting established fund” to take care of expenses you’ll incur when you start off on your own. You know, like security deposit and furniture for your fabulous new apartment. Don’t go overboard, but make sure you’ve got a nice cushion of savings before you dive into investing.
Investing What You’ve Got
So, you made it through the three questions, and you’ve decided it’s time to start investing. But, that just brings us back to the original question: HOW? The way I see it, there’s two ways to go about this:
No-Minimum Online Brokerages
Check out sites like ShareBuilder and Zecco – you can buy stocks and pay less than $10 in commission each time. Since there is a charge, what you’ll want to do is save up your investment money in a savings account, and then buy larger amounts every few months.
What, exactly, are you buying? Well, if you want to try your hand at individual stock picking, that’s your deal. But what I would do is buy index fund ETFs. These are little funds that act like stocks, but what’s really inside them is a tiny share of every stock in the market that it’s tracking. So if you buy an ETF that tracks the S&P 500, you’re getting a tiny share of each of 500 companies! Instant diversification.
Or… Save Up for Vanguard
Ok, so, why buy index fund ETFs instead of just buying index funds? Well, this again brings us back to the original question: how to do this with less than $1,000. Index funds have a really big buy-in. Vanguard’s index funds require a $3,000 minimum investment! Who’s got that lying around?
But the advantage to buying an index fund directly is you go from paying commissions to paying “expense ratios” – or a percent of the value of the fund. The reason I bring up Vanguard is that they’re known for having one of the lowest expense ratios around. Mmm… tasty low-cost index funds… that’s what I want!
So here’s what I’m doing: I’m putting money away each month in a savings account, building up to that $3,000 minimum investment. Once I get that, I can buy my coveted Vanguard index fund! And once I’ve made the initial investment, I can buy individual shares of that fund at my leisure. (I’ll do this within a Roth IRA, since the goal here is retirement!)
Saving up $3,000 can seem really, really frustrating. In fact, it was so frustrating to me, that I just gave up the first time I found out about Vanguard’s $3,000 minimum. I was 18 at the time, and I just pushed it out of my head – I’d never save up that much!
But… if I’d put aside $100 a month instead of giving up, I would have reached $3,000 six months ago. That’s food for thought.