Thursday, October 20, 2005

Investing At All Budget Levels

Investing can begin at all budget levels.

Over at The Motley Fool, you can invest with just $20, or with $100, or with $1,000 plus.
I might have to start with the $20 dollar level, of course.

How to invest $20:

One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.

More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.
While you have to keep good records for tax purposes, Drips may be one of the surest, steadiest ways to build wealth over your lifetime.

How to invest $100:

Consider investing it in an index fund. An index fund that tracks the S&P 500 is your entrée into an investment that has traditionally returned 11% a year, and lately has been doing a good bit better than that.

There are some index funds that require as little as $250 for you to call yourself an owner. This low minimum is usually restricted to IRAs (Individual Retirement Accounts). After your initial investment, you can add as much money as frequently as you like for no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.

If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.

How to invest $1,000 plus:

With $1,000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1,000 a year to add to your original investment:

Say you've got 40 years to retirement. If you start with $1,000 and invest an additional $1,000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it.

The key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. Nowadays, with such low commissions being offered by discount brokers, it's easy to manage your account for much less than 2% of your assets annually.

So, there it is! I may still have some hope. I need to start soon in order to take advantage of the compound interest (the sooner you save, the longer the time period you have before retirement... mean the better the compound interest works hard for you).

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