How Young Adults Can Start Investing with Small Amounts

As a young adult, you've heard the advice: start saving now for your retirement, put your money in the stock market because it is your best bet for superior long term returns, and make investing a priority. While this advice may be right on target, your reaction may be that you simply don't have enough money to make investing in stocks worthwhile.

If you are living from paycheck to paycheck and devoting anything left over after paying for necessities to reducing your student loan balances, then investing may have to wait. On the other hand, don't delay starting to invest because you believe what you can budget for investing is too modest. There are a variety of ways you can begin to invest with small amounts.

Enroll in your firm's 401(k). One of the best ways to maximize your investment dollars is to enroll in your firm's 401(k) retirement plan. There are two reasons this is true. First, if your contributions are matched by your employer, you are effectively doubling your investible funds. Second, tax advantages of 401(k) contributions (they are tax deductible and you owe no taxes on what you earn on them until they are withdrawn), mean the same amount contributed to a 401(k) goes much further than when invested in a taxable account. Therefore, even if you can only put $25 or $50 a month in a 401(k), do it.

Take advantage of direct stock purchase plans. Many companies offer direct stock purchase plans that allow investors to purchase shares (including fractional shares) directly through the company's transfer agent at little or no cost. This is a great way to start to build a position in a stock even if you can only invest a little at a time.

Reinvest dividends in more shares. If you purchase shares of a dividend-paying stock through the company's direct stock purchase plan, if possible, sign up to have dividends reinvested in the shares as well, which will allow your ownership in the stock to grow even faster.

Invest in a mutual fund. Many mutual funds require an initial investment of $1,000 or more, but there are some that allow you to start with as little as $100. An index fund that aims to perform in-line with the stock market might be a good choice. While this can be a good way to invest in a broad range of stocks, be sure to do your homework on a fund before sending in you first check. Among other things, investigate its investment style (to be sure that it matches your goals), its investment managers, its historical performance, and its expenses.

Consider ETFs. Another way to invest in a diversified portfolio without a large amount of money is to buy shares in an ETF that is designed to mimic a market index such as the S&P 500.

Pay attention to these tips to get the most out of the modest amounts that you can invest initially.

Keep expenses to a minimum. While commissions, fees and operating expenses can eat into returns on accounts of any size, they can be especially harmful to the returns on modest accounts. Therefore, always take these costs into account when choosing how and where to invest.

Second, invest consistently. Small amounts invested regularly and wisely can turn into real money surprisingly quickly, so try to set up an investment plan that includes consistent (and, if possible, automatic) investments. Investing on a regular basis also allows you to take advantage of dollar cost averaging (purchasing more shares for the same amount when a stock or the market is down and fewer shares when it is up).

Sources:

www.wikihow.com, How to Invest Small Amounts of Money Wisely - wikiHow

Jeremy Vohwinkle, financialplan.about.com, How to Start Investing with a Small Amount of Money

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