Saving and investing have never been a strong suit for most Americans.
According to Bankrate, the average U.S. household has just over $8,800 set aside in savings, though that number is skewed due to the fact that older Americans have more on average ($17,000-plus) versus those 34 and younger, who have an average of about $4,700 saved up.
That’s just in liquid savings, though.
The median retirement savings by age in the U.S., according to the Transamerica Center for Retirement Studies, is: “Americans in their 20s: $16,000. Americans in their 30s: $45,000. Americans in their 40s: $63,000.”
Still, these numbers are far short of where they need to be for most people, given that the typical retirement is going to cost north of $800,000.
Building up Your Investment Account
Investing early and often is the best way to catch up with these needs, but too often people will hold off on taking the leap due to the fact that they don’t have much to invest at the start.
Investing with a small amount to start might seem like a disadvantage, but it can actually be a great way to learn about the investing process and tailor a strategy that fits your needs. Especially if you start small, think about your first $1,000 as the start of a long-term journey, not a one-off opportunity to multiply your money with the right pick.
[You can even start investing in art with as little as $1,000 with Masterworks. Learn more.]
Starting Small as an Investor
- Do your homework. Each publicly-traded company is required to publish certain reports, which are typically available on their websites or on the U.S. Securities and Exchange Commission’s (SEC) filing database, EDGAR. These forms include the 10-K, which is filed annually and includes independently audited financial data for the last five years. The 10-K is a very comprehensive form, including information about a company’s earnings, risk factors, and management. A 10-Q, filed quarterly, includes quarterly financial statements as well as discussion about market risks and any legal proceedings. Things to look for include net income (which indicates whether the company finished with a gain or a loss), price-to-earnings ratio (a marker of stock performance), and return on equity (which describes how effectively the company has returned investments to shareholders). In addition to the company’s financial information, you should have a thorough understanding of the company’s business model and values before investing.
- Set your goals. In addition to determining your risk tolerance, set realistic goals for the returns you’d like to see. Think about each return as a chance to reinvest, growing your portfolio as you grow your capital.
- Use a robo-advisor. Robo-advisors are online investment platforms that automatically manage your investments and many of them are specifically designed to help investors determine their risk tolerance, creating a platform based on that. These kinds of robo-advisors can help eliminate the guesswork and allow you to grow your money without worry that you’re doing the wrong thing or focusing on the wrong asset classes.
- Keep it simple. Don’t get bogged down in all the different investment choices out there. Stick to the basics. Mutual funds and ETFs can be relatively inexpensive to buy into and allow investors to easily diversify. Mutual funds pool money from investors and invest them into a variety of securities including stocks, bonds, and short-term debt. ETFs similarly include different types of investments, including stocks, commodities, and bonds. Best of all, many funds allow you to both automate your investments each month as well as buy in at small, even dollar amounts, just like transferring money into a savings account.
- Consider Certificates of Deposit (CD). Although CDs offer lower returns than some other investment options, they are a very safe place for investors to start their portfolios. Remember, though, that with a CD you are exchanging access to you money over a certain period (ranging from a few months up to 10 years or more) for a high interest rate. Your money will be locked up until maturity.
- Don’t waste money. When it comes to investing, fees are everywhere. While you likely won’t be able to avoid them altogether, you should be aware of what you are paying and for what services. For example, many ETFs trade with no commission fee, but have a significant annual expense ratio that will end up costing you more.
Investing with $1,000 or less is like buying your first pair of running shoes. When you purchase the shoes, you might have the goal of running a 5k, a marathon, or even an ultra in mind— a choice that’s entirely up to you. But, whatever your goal, know that those will not be the last pair of running shoes you buy.
Similarly, your first small sum investment should be your first step towards a comprehensive portfolio, not a one-time only investment.