Getting
started investing is tough. Many investment accounts have minimums that keep
small investors at arm’s reach, for instance.
But a larger question remains: Should a
small investor even be in the market? If you have saved up $ 1,000 and want to
invest in something, somehow, here’s a few issues to consider first:
1. Sock it away in a savings account
Do you have
enough cash in the bank to cover the deductible in the case of a car accident
or health emergency? Enough to cover an unexpected home repair? The simple fact
of the matter is that most small investors fail not because they don’t know
what to buy but because they aren’t ready to absorb a short-term financial hit.
Do this simple exercise: Add up your current
monthly expenses and multiply by six. If you don’t have that much money in the
bank in a standard savings account, get to that point before you consider
investing in the markets. You’ll be calmer and happier for it, and probably a
calmer and happier investor.
2. Pay down debts first
Money
compounds both for and against you. When you have consumer debt, especially
credit cards, you are paying a much higher rate of interest on those loans than
you will make in the market.
Pay off all short-term debts before
investing. It’s important to invest early and consistently, but not if you owe
significant amounts at high rates of interest. If you have $1,000 to invest in
something, the most important “return” on your money today could be eliminating
extended debt payments.
3. Consider a balanced index fund
Cash
cushion in place and debts paid off, now it’s really time to invest. If you
have $1,000, open and fund an IRA at your bank or online at a brokerage. The
least expensive and most effective way to invest a small amount is to buy a
balanced index fund, such as a Vanguard LifeStrategy fund. Once you have the
balance up to $25,000 or so, consider buying a portfolio of inexpensive ETFs
and rebalancing that portfolio prudently over time. Saving, investing and
living debt-free go hand-in-hand. All three matter to your long-term financial
health.