Compared to the huge minimum deposits required for most traditional investments, $100 is just a drop in the ocean. Because of this, many people see the investment of smaller denominations of money as being futile in their quest to achieving financial success. But, what these people don’t realize is that building wealth is a slow process and that it doesn’t matter how small you start.
While it’s true that investing $100 a month won’t exactly earn you a seat next to Jeff Bezos at the next billionaires’ summit, starting small, rather than remaining static, will definitely move you a rung up on the financial ladder. As long as your time horizon for your investment is long enough, you’ll be amazed by how much investment power lies in $100.
In fact, there exists many interest-bearing investment accounts that exploit the power of compounding and as a result, offer high potentials for steady wealth accumulation. So let’s now go through 5 ways you can invest $100 a month!
Method #1 : Investing In Single Stocks
The first way to invest $100 a month is by buying individual stocks. I’m sure you probably didn’t expect the stock market to pop up first, but here we are. Although traditional investment firms will require you to cough at least $1,000 for you to make your first stock market investment, robo- advisors such as betterment and M1 finance will allow you to start small.
There’s no denying that Wall Street is an intimidating investment platform, especially if you are pinching pennies and can only spare 100 bucks for your financial goals. Up until recently, investing in the stock market was a very expensive venture. Most brokerage firms demanded exorbitant minimum deposits and the commissions for trading in stocks are equally frustrating. This created the impression that the stock market is for top-class investors with millions of dollars to spare, yet this is far from the truth.
Thanks to the overwhelming shift towards fractional shares, novice investors can now make their dent in the stock market even with modest contributions. Through partial ownership of shares, you get to own a small fraction of company stock as opposed to full shares which are more expensive. This allows investors to be more deliberate with the amount of money they are willing to invest in a particular company.
On top of that, this means that anyone can start building their investment portfolio even with as little as $5 and still reap percentage gains similar to any other investor in the market. And just because you’ll be investing modestly doesn’t mean you should settle for sub-par companies. Owning partial shares is a smart way of buying into blue-chip companies with a small amount of money, and as a result, diversifying your portfolio by investing in multiple companies at a go.
There are brokerage accounts that allow you to buy into fractions of profitable companies such as Netflix with as little as $100. Usually, you’ll need anything north of $400 to invest in one full stock of such a company. Therefore, every month, you can channel your $100 into buying partial shares of wide-ranging companies as a strategy for building an all-rounded portfolio through partial shares.
Method #2: Investing In Mutual funds
Moving on, another way of investing $100 a month is through mutual funds. A mutual fund refers to a company that pools investors’ money together with the goal of investing in assets that offer high returns. A typical mutual fund will buy into stocks, bonds, and any other promising securities, then hire an expert portfolio manager to steer the investment on behalf of other investors. Such funds offer small or beginner investors access to top-rated portfolios and equities, even with a small capital to invest. Investors will acquire returns through stock dividends or interest gained from bonds.
Some popular mutual funds within the financial markets include S&P, Vanguard, Fidelity 1000 mutual fund, and the Dow Jones Industrial Average. One top benefit of mutual funds is that they are less risky than buying individual stocks, which makes them viable for investors who are not in a hurry to get their money back. So if you are planning to set aside $100 a month for a vacation that’s five years away, your kid’s college education, or your retirement goals, mutual funds will be a worthwhile investment. Besides, unlike investing on your own, you’ll also have someone else worrying about the market trends and picking the winning stocks. With mutual funds, investors can easily buy into fractional shares which, as I just mentioned, are cheaper than full shares. On top of that, mutual funds exploit the concept of dollar-cost averaging which propels them towards accruing substantial gains.
This strategy scraps the need for market timing since you’ll be trading on a pre-determined schedule. The idea is to invest $100 a month in a mutual fund regardless of whether the stock is fluctuating upwards or downwards. This way you can easily take advantage of the volatility of the stock market by buying more shares when the prices fall, and buying less when the prices shoot upwards. As you steadily build your portfolio through the mutual fund, your $100 will have an increased purchasing power when the prices fall and vice versa.
Another advantage of buying into mutual funds is that you’ll be charged the same fees regardless of the amount of money you invest. The Management Expense Ratio, which refers to the monthly fees that a mutual fund will charge its investors, is lower relative to the commissions charged for investing in individual stocks. As a result, you won’t have a significant amount of your returns slashed by exorbitant investment fees and commissions.
Method #3: Buying Bonds
Investing in bonds is another brilliant investment path to take if you have $100 a month to stash away. Technically, bonds act as loan agreements between two parties, usually an investor and the state. At times, the government, companies, or small businesses will need a monetary backup to service pending debts or to simply stay ahead of their annual budgetary allocations. So technically, you’ll lend them a certain amount of money which they’ll pay back after a mutually agreed time period. This time period is usually referred to as a maturity date, while the interest paid on top of your initial investment is called a coupon. Bonds can either take a long-term or short term route, hence it’s up to the investor to choose the time frame that best suits their needs.
Unlike the stock market which thrives on speculation and analytics, investing in bonds guarantees returns once the agreement period matures. Compared to stocks, bonds are a considerably less risky investment to dive into and are known to create the sought-after balance in investment portfolios. And if we take into account the popular investment maxim that the higher the risk, the higher the return, you’ll find that bonds are likely to earn you relatively lower returns than individual stocks or mutual funds.
The only difference is that with bonds, the bondholder is guaranteed fixed periodic payments. If you are new to this type of investment, there are a few things you’ll need to grasp. First off, keep in mind that bonds are a widely-diversified investment breed, hence you can choose the type of bond that best fits your portfolio and long term financial goals. Second, this type of investment can be used in conjunction with the stocks in your portfolio to hedge against large sways in the market, offering you diversification and lowering your overall risk. Therefore, if you want steadier returns then bonds may be the best way to invest $100 a month.
Method #4: Leveraging Your Employer’s 401(k)
Is there a better way of investing than pumping up your retirement fund? For anyone who is looking forward to having a comfortable retirement, you need to start saving for it from the get-go, and $100 a month is a good starting point. Saving for retirement has countless benefits, especially if you start early. Most retirement funds exploit the concept of compounding, and if you combine this with a long time horizon, you’ll be pleasantly surprised at how much money you will have in the long term.
Another added benefit is that most retirement accounts are cushioned from crippling taxes that would otherwise eat into your long term returns. Employer 401(K) matching has for a long time been the biggest motivation for saving for retirement. For starters, a 401(K) contribution is a verified retirement plan that allows qualified employees of any company to start building their retirement funds on a tax-free basis. Typically, you have the freedom of deciding on the percentage of your pre-tax income that you want to be deducted from your monthly paycheck and directed to your retirement fund.
Some employers contribute a specified matching amount which is commonly referring to as employer matching. Assuming that $100 per month amounts to 6% of your monthly income, and your employer offers a matching contribution of 100%, you’ll have an estimated $39,069 after 20 years if you earn the stock market’s historical average of 7%.
Now, this investment strategy would be more beneficial to someone who is just starting out their career but can be beneficial to anyone who wants to leverage the power of retirement savings vehicles like the one I just mentioned. And in case your employer doesn’t offer a retirement plan that is accommodative enough, you can opt for tax-advantaged retirement accounts IRAs.
Method #5: Contribute To Money Market Accounts
If the time horizon for investing is short, let’s say five years or so, long term investments like stocks and bonds may not be an ideal option. Instead, you’ll need to invest your $100 a month in a low-risk investment vehicle that guarantees significant returns even in the short term. This is where interest-bearing money market accounts come in. Simply put, these are accounts offered by traditional banks or credit unions and are almost similar to traditional saving accounts.
But unlike basic saving accounts that offer meager interest rates, money market accounts offer significantly high-interest rates for the short term investor. So technically, a bank or credit union will require you to deposit a specified amount of money with them and pay you interest which is compounded on a daily basis. This deposited money will then be loaned out to borrowers, and they’ll be charged higher interest rates for the loans. So in a way, you’ll be loaning the bank your money and they’ll be paying you back with interest.
One of the biggest differences between basic saving accounts lies in the interest rates. In 2019 for example, the average interest rate of money market accounts was 0.15% while that of traditional saving account was 0.09%. If you compound this interest on a monthly or annual basis, you’ll find that these interest rates bear substantial significance to a depository account in the long run.
So typically, the respective bank or credit union will require you to deposit a given amount of money, after which you’ll need to keep your balance above a certain level. Additionally, money market accounts still offer countless benefits to depositors. For example, you’ll be issued with an ATM card, checks, and deposit slips.
One way of exploiting the potential of money market accounts is maintaining a high minimum balance throughout the investment period and restricting the frequency of your withdrawals. You can check in with online banks that allow you to deposit $100 monthly to your money market account and start investing.
As you’ve seen from the previously mentioned methods of investing, $100 a month is a lot of money when invested the right way. The stock market, bond holdings, money market accounts, mutual funds, and employers 401(K) are all smart investment moves that will see your money grow.