How the Internet, Discount Brokers, and Automatic Investment Make for Cheap Investing

News stories abound that report how we're not saving enough as a nation for our retirements, our kids' college expenses and our futures. What do you do if you're one of the many (22% of Americans according to CNN Money) who are not saving anything at all? That emergency fund in your savings account doesn't count; I'm talking about a long-term investment that will grow as you do.

You should start by establishing why you're not saving anything. Is your budget so tight that there's no money left over to invest? Or do you not even have a budget, and thus have no idea where your money is going? Or are you currently spending all your extra income paying off your debt? While paying off debt is the fiscally responsible thing to do, a responsible investment plan may still have a place in your monthly budget - as well as a powerful psychological factor that will influence your financial future.

Brokers and investment companies keep their costs down by dealing in volume. It takes just as long for a fund manager to buy a million shares as a thousand, so the cost-effective thing to do is encourage investors to invest large sums of money, either with minimum balances in the thousands, or with transaction fees that comprise a prohibitive percentage cost for small sums but work out for longer ones (if I pay five bucks to invest a hundred, I'm down five percent before I even get in; on ten thousand the same fee is a mere twentieth of a percent).

Automation, internet transactions, and an increasingly efficient financial marketplace have made it cost-effective to go after smaller investors. Charles Schwab, for example, now offers some funds you can start for as little as $100.00. The "catch" (but it's actually a big plus for you) is that you'll have to sign up for an automatic investment plan. This virtually guarantees that your paltry seed money will grow to thousands of dollars in just a few years: that's good for Chuck's bottom line and great for you.

Most financial experts agree that you should not invest until you're out of debt - the risk outweighs the potential benefits of, say, earning eight percent while you're paying four percent on a student loan. They will make exceptions if your only debt is a reasonable first mortgage, or if you're investing in a retirement account to take advantage of your employer's matching program (read: free money). But I would argue that a micro-investing plan, consisting of a few hundred down and a hundred dollars a month, is worthwhile even if you're still paying your way out of debt.

First of all, let's put the cost in perspective. Anyone who says that they can't find a spare three dollars a day in their budget, or a way to generate that much additional income, is either raising quintuplets or not being honest with themselves.

Second, let's talk about the psychological gains. If you invest $100 in a large-cap growth-oriented mutual fund, and sign up to have an additional $100 per month taken out of your checking account, you'll have roughly twice the account balance on your second statement as you did on your first. Two months after that, your balance will have doubled again. Watching your balance skyrocket - even though it's almost entirely due to your contributions and not the "growth" your fund is named for - will teach your brain the lesson that your ten-dollar passbook account when you were a kid was supposed to: the investments exist to increase over time, that one dollar today is a hundred dollars tomorrow. You'll also see line items like "dividends reinvested" and "capital gains reinvested" on your statement: at first a few cents a month, then a few dollars and then more. It's as if someone else is feeding your account, not with hundred dollar bills like you are but with spare change. The difference is that that "someone else" is contributing more and more every month, even though you're still contributing the same amount. Eventually, that "someone else" will be contributing as much and then more than you are. That "someone else" is the account itself, feeding itself through the magic of compound interest and capital appreciation.

Finally, having such an account can serve as a motivator to get the rest of your finances in order. Seeing that account balance climb will make you want to pour even more money into it. Which you can do after you've paid off the rest of your debt. Maybe you'll make deals with yourself: once you get rid of this one debt you're paying off at fifty dollars a month, you're allowed to increase your $100 per month to $125. Eventually, you'll be out of debt, and ready to turn this single-fund "toy" investment into the foundation of a diversified portfolio that will give you the future you've always wanted.

Isn't that worth a hundred bucks a month?