Many people regularly put a bit of money aside, mostly in a savings account. We all know that just saving isn't always useful when interest rates are low, so where do we turn? To investments.
Think that you don't have enough money to invest? There is no reason to wait until you are rich. On the contrary, "starting small" is the best first step to achieving your financial goals.
Benefits of Small Investment
If you can only plan for the long term with limited amounts of money, you are faced with the question: is investing even worth it? If you invest $500 with 5% interest, you will get $25 interest in the first year. Nevertheless, the investment can bear considerable fruit if it is made in the long term. This is made possible by the so-called "compound interest effect" - if you continuously reinvest the interest and it also earns interest, your returns will grow exponentially.
If you choose a reliable broker, like brokstock.co.za or Firstrade, and invest the $500 for 30 years with the interest of 5%, you will get back a total of $2,160 with compound interest - so your invested capital has more than quadrupled.
Conversely, the inflation-related price increases of goods and services also accumulate. As long as the interest rate on traditional savings products is below the inflation rate, you will lose purchasing potential if you do not invest your money.
Many investors find it psychologically easier to invest smaller amounts on a regular basis. Those who invest their money in staggered amounts may forego returns, but the risk is lower thanks to the so-called average price effect. Investors buy fewer expensive shares during a stock market boom and more inexpensive shares when prices are low, and the purchase price for the fund shares evens out over time.
Investment funds are ideally suited for the long-term accumulation of assets. Even with small sums of money, it is possible to make broadly diversified investments worldwide. Of course, it is not the only way to invest money, so let's look at a few more examples.
Top 5 Best Ideas for Small Investment
Investing money used to be more for the wealthy. But today, with all the new financial products and digital tools, it takes less money to actually invest. Here are a few ideas on how to make more of your money with small amounts:
- ETFs - Exchange Traded Funds are usually passively managed funds, meaning they don't have fund managers, but follow an index. If you invest small amounts, then broadly diversified ETFs are very suitable.
- Mutual fund - It is a kind of standing order with investments in a fund. You decide how often you want to deposit and what amount. An ETF works similarly to a mutual fund: you set an amount, for example, per month, and this is then invested.
- Buy shares directly yourself. Nowadays this can be done through an online broker. However, you have to know the industry and the companies well or have several different shares from different industries and companies. This is possible to achieve with small amounts and but be careful with the order fees as they can be relatively high.
- Crowd platforms - In addition to traditional investments, there are also more and more new tools where investors join together to crowdfund, -lend, -invest, -donate. This form of investment is getting more popular every year.
- Alternative investments. You can of course also try to increase your money with alternative investments, such as gold, real estate or real estate funds, various currencies, commodities, etc. However, large fluctuations can occur so research the potential investment very carefully since you can quickly lose the small amount of money you already have.
So, as you see, there are a lot of opportunities even if you do not have much money for an initial investment.
How to Get Started
Before you actually start investing, there are a few things you will need to do and decide:
- Determine your investment horizon. It is important to know how long you want to invest your money. Your goals are critical to this. Investment horizon and investment goals are directly correlated.
- Become aware of your risk tolerance. Personal risk tolerance should be a major influence on your investment decision. Only if you stick with it and follow through with your plan will you have long-term investing success. The biggest enemies of the investor are their own fear and too many emotions.
- Determine your starting amount. Before investing, realize how much money you can put toward your investment goals without worry. To do this, you need to compare income and expenses and see how much money you have available each month to invest freely. Even thou you can invest $5 (some online brokers allow it), we recommend having at least $500 at the start.
- Open an investment account. The last step is to choose a broker and make the deposit.
That's it, you are ready to invest.
Bottom Line
Many beginners in the financial market lack patience - and they tend to sell shares or even ETFs very quickly if they do not generate profits quickly enough or prices fall for a while. However, this is not advisable. A well-diversified number of shares or ETFs that a bought over a long period of time promise much more stable profits. Patience is therefore called for. Anyone who trades in stocks and sells them too quickly or too often is much more likely to incur losses.
Whether you choose to use an investment advisor to manage your investments, consult a roboadvisor, or buy ETFs, you'll be in a much better position if you start investing now instead of leaving your money in a low-interest account or spending everything you earn. The younger you start investing, the more you can benefit from compound interest and build real wealth. So start today - open your brokerage account now and throw your money into the market to make it work for you.
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