The old adage “it takes money to make money” has never felt more true than with investing. From initial investment minimums to annual expense ratios and management fees, by the time you work down the list of investing-related costs, the expenses seem more than the potential returns. These costs pose even bigger hurdles for someone with limited savings to invest, but this doesn’t have to be the case.
Daniel Kern, chief investment officer at TFC Financial Management in Boston, says you can build a good foundation with only a few low-cost, well-diversified funds but getting started is the hardest part.
[See: 10 Ways for Investors to Buy the Market.]
Start with attainable goals. Before you begin investing, “set yourself up for success by starting with near-term priorities and smaller, attainable goals,” such as an emergency fund, says Yvette Butler, president of Capital One Investing in McLean, Virginia .
Think of your emergency fund as a cushion for your investments. It’s there so that “if things get tight, you won’t be forced to access longer-term investments that have yet to mature,” Butler says. Tapping investments early can handicap their growth potential and result in heavy transaction costs and early withdrawal penalties.
Patrick Dinan, president of Impact Fiduciary in Los Angeles, says investors who are single should have at least six months of expenses set aside in a federally insured bank savings or checking account. Couples should target three months of living expenses each.
Pay off high-interest-rate debt. The most effective investing plans include paying down debt and investing, says Andrew Crowell, vice chairman of D.A. Davidson & Co. Individual Investor Group in Los Angeles. He says people often fall into the trap of thinking the best way to tackle their debt is to accumulate enough savings to pay off all of their obligations at once, but this is false reasoning.
Debt repayment should be viewed as a form of investing. For every dollar of outstanding debt you pay off on a credit card charging 15 percent interest, you are effectively earning a 15 percent guaranteed return on your money.
To repay your debt, Crowell suggests paying the minimum on your lower-rate debt while putting as much as you can toward your highest-rate debt until it is fully repaid. Continue paying as much as you can toward your next-highest rate debt until all obligations are eliminated. As your debt becomes more manageable, you can begin investing in the stock market as well.
[See: The Top 10 Investment Portfolio for Millennials.]
Participate in your employer-sponsored plan. Employer-sponsored plans are a “great way to start ramping up your savings quickly at a very low-cost entry point,” Crowell says. Many plans will lower or eliminate the minimum investment requirement on the funds in the plan. “So even if you’re investing $10 or $20 per paycheck, you can still get into the plan, diversify your dollars and begin building your savings,” he says.
Dinan loves 401(k)s as a savings vehicle because you automatically pay yourself first each paycheck. You can set the amount you want to contribute based on your budget. It could be $10 per week or $50 per month, or any amount up to the annual limits, which are $18,000 for 2017 and $18,500 for 2018 ($24,000 in 2017 and $24,500 in 2018 for catch-up contributions). Kern likes 401(k) plans for the curated list of fund offerings they provide, “which can bring the range of investment choices down to a manageable level.” If your employer offers an employee match, contribute at least enough to maximize your match because it’s free money in addition to any return on your investments.
Use a Roth IRA if you don’t have an employer-sponsored plan. If you don’t have access to an employer-sponsored plan, Dinan recommends opening a Roth IRA. Although Roth IRAs can’t provide the immediate tax benefit of lowering your adjusted gross income, they do offer tax-free growth. Since you won’t have to pay taxes on your earnings, they will be able to compound faster than in a taxable account, helping you reach your investment goals sooner.
If you sign up for automatic investing, with regular contributions made directly from your bank account into the Roth, some firms may even waive their investment minimums, Kern says. He suggests investors who are saving for retirement use target-date funds, which can provide built-in diversification and an age-appropriate asset mix that changes as retirement nears.
Choose low-cost investments. If you have limited resources to invest, choosing funds with low expense ratios is key. As a rule of thumb, Crowell says expense ratios should be below 1 percent for actively managed funds and less than 0.75 percent for passive funds. Index fund expense ratios should be even lower, less than 0.2 percent. U.S. News lists best-ranked funds by category; click on each ranked fund’s name for more details about expenses, minimum investments and annual returns.
Exchange-traded funds and mutual funds offer investors with limited cash the ability to diversify and save for other things besides retirement. For those investors, Kern says a good place to start is with funds that provide comprehensive stock or bond market exposure.
For instance, the Vanguard Total Stock Market Index Fund ( VTSMX) — also available in ETF form as the Vanguard Total Stock Market ETF ( VTI) — or the Schwab Total Market Fund ( SWTSX) can provide low-cost exposure to the broader U.S. stock market. For bond exposure, Kern likes the Vanguard Total Bond Market Index Fund ( VBMFX) or the Vanguard Total Bond Market ETF ( BND). “Investors who want to delegate their investments to someone can consider the robo advice solutions offered by firms such as Schwab, Vanguard, Betterment or Wealthfront,” he adds.
[See: 9 Things to Know About Robo Advisors.]
Once you’re over the first hurdle of getting started with investing, Butler says not to worry too much about the day-to-day market news. “Instead, stay focused on the things you can control, such as keeping an eye on your expenses, investing regularly and maintaining a well-diversified portfolio designed to help you achieve long-term goals.”
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