The biggest misconception about investing is that you need a lot of money to begin investing. Whether you have $100 to spare or $100.000, you can start investing with whatever amount you want. The ‘secret’ to becoming wealthy is to let your money work for you and you need to start as soon as possible.
A common saying in the financial world is : the best time to start investing is 20 years ago, the second best time is today. You do NOT want to miss out on the benefits of compound interest.
The Backstory – The Big Effects of Starting Small
I started my investing career small; very small. With only $200,- available for investing, I decided to give it a go. I always thought you could only invest if you had a lot of money and therefore I postponed my first investment for some months. However, I decided to take the leap when my professor urged to to start as early as possible.
I Went For It
The hunger to build my wealth was fueled because I had actually started investing. I added money to my investment capital regularly and I noticed that the account grew surely and steadily. Just one year later, my account had grown more than ten-fold, and I started noticing the daily swings of 1% in my account. If I didn’t start a year prior, I would have probably not started at all.
‘’At some point, you just have to stop thinking and start doing it’’ – Pawel Nolbert
At that time I built an investing account of $2500 in my first year of investing by adding regularly. I planned these investments to be my so called ‘nest-egg’ for retirement, and therefore it had around 45 years to grow before I would sell.
While 45 x 2500 is only 112,500, I would end up with $816,885 if I add $2500 every year for 45 years! These numbers are incredible and show why you should start as soon as possible. This immense growth is made possible by the principle of compound interest. Compound interest has a few big names in its corner:
- Warren Buffet: ” My wealth comes from being born in America, getting lucky with genes and compound interest”
- Albert Einstein: ”Compound interest is the most powerful force in the world. Those who understand it earn it. Those who don’t pay it.”
Although the markets never guarantee anything and there are always risks involved, you can keep in mind that the average return of 7% involved the biggest economic crashes in history (1929, 1987, 1999 and 2008) and is therefore a solid assumption to make.
All in all, growing your account takes time. However, start as soon as possible to make the most use of the passing time and see your account grow. In a lot of cases, one ounce of action is worth ten ounces of theory!
The Strategy – Making Investments That Pay
If you’ve always thought that it isn’t worth investing with small budgets – think again. Read on to learn how you can use compound interest, dollar-cost averaging and ETFs to make investments that pay, despite a limited budget!
Building a Strategy Around Dollar Cost Averaging
Dollar Cost Averaging can be best described as follows:
‘Buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price.’
The way to do this effectively is to start out by determining the amount of money you have available to invest each month, and invest that into a low cost ETF/index fund every month until your portfolio builds significantly over time. But not just randomly!
With the dollar cost averaging method you’ll want to invest according to a fixed schedule. That could be monthly, quarterly or semi-annually. However, it’s advisable that you to invest monthly since this minimizes the risk of over-investing when stocks are expensive.
This method requires minimal effort and minimal emotional stress. Additionally, this methods lends itself well to beginners seeking to build a solid portfolio. Beginners are prone to make costly mistakes because of lack of skill and experience. Following this method eliminates some of that potential for human error.
There are three simple steps to make this strategy a success.
STEP 1|Make Sure You Pay a Low (or no) Transaction Fee
Let’s say you invest $200,- on a monthly basis into an ETF, where you pay a transaction fee that amounts to $10,-. In doing so, you already lose 5% of your money before your first 24 hours of making the investment.
Moral of the story?
Find a broker that offers the lowest transaction fees. Especially if you have a low income; even if that means paying a higher management fee. The costs will eat your portfolio alive and that shouldn’t be underestimated.
STEP 2| Buy a Low Cost ETF or No-load Index Fund
Make sure you buy an ETF with a low expense fee to save yourself some costs. iShares and Vanguard offer very good ETF’s with a low expense fee. I use the Vanguard All-World High Dividend ETF, the Vanguard S&P500 ETF and the iShares Stoxx Europe 600. All because of their broad diversification across solid countries and industries, while having a low expense fee.
STEP 3| Automate Your Investments
Automating your investments is possible at almost every broker. Ask them for help if you can’t figure it out on your own (or check out our ultra basic guides in the GetGo Huddle). Choose your regular investing period (preferably every month), determine the fixed amount of money you want to invest and pick a cheap, diversified index fund to invest in.
Automating your investments will relieve you from a lot of hassle. It can really be a struggle to have to determine every month at which point in time you are going to invest. No one knows exactly what the market will look like tomorrow or two weeks from now.
Save yourself the pain and energy of trying to guess what the best times will be to buy. With dollar cost averaging you will eventually buy at some low points, and some high points. Therefore this strategy will provide you a solid return over the long run and saves you energy and time, which I’m sure you can put to better use!