Investing is an attractive idea to anyone who wants to build wealth, but to newcomers it may seem like a method that works for those who are already wealthy. Historically, the S&P 500 has returned an average of around 10%Â each year. If you have a million dollars in the bank, that’s a cool gain of $100,000 each year on average. But if you only have $100 to invest, the $10 you see won’t get you very far.
So how can you grow a sizable investment portfolio if you’re starting from practically nothing?
The basic idea
Remember, almost everybody starts with nothing. The most successful businesses in the world still had to start with limited cash reserves, nervously building their bank accounts over their first few years of operations. You too, as an individual, can gradually move from an empty brokerage account to one that’s flourishing with activity.
It’s not going to happen overnight. Even under the most optimistic forecasts, you’ll still be relying on the power of compound interest to see the growth you want. The goal is to accumulate enough money to get your foot in the door, pick stable investments with growth potential and let accumulated interest and additional contributions over time get you to the position you want to be.
The question, then, is how do you get initial capital, and how should you invest it once you have it?
Securing initial capital
We’ll start by looking at your options for generating capital, or investing without it:
- Financial leverage is a way to increase the potential investing power of a small amount of money. It is especially advantageous if you don’t have much to invest. For example, a small down payment can help you buy an expensive house, and options trading can help you make big bets without much upfront capital.
- Employment programs. Check with your employer to see if there are any investment or retirement programs you haven’t yet taken advantage of. Many employers offer a 401(k) with a company match, which essentially means free money (up to a certain percentage of your salary). You won’t miss the few dollars out of your regular paycheck, but your principal can add up fast.
- Additional income. You could always pick up a side gig, such as driving for a rideshare service or selling crafts online. Even if you only make a few hundred extra dollars per month, that can add up to a substantial investment amount by the end of the year.
- Spare change. You could always try the “cookie jar” approach, setting aside all your spare change for eventual investment. The financial app Acorns can even do this for you automatically, rounding up your purchases.
- Expense replacement. One alternative strategy is to eliminate a current expense you have and use an equal amount of money to invest on a recurring basis. For example, if you cancel your $20-per-month entertainment subscription, you could end up with an extra $240 per year to invest. That may not seem like much now, but after a few years and compound interest working in your favor, you’ll establish a strong foundation for your investment portfolio.
What to Invest In
We can’t give you advice on what to invest in specifically since your goals and risk tolerance will vary. For example, stocks with high growth rates are typically less predictable and, therefore, riskier than an investment like bonds. Only you can identify your goals and choose your assets accordingly.
We can, however, give you advice on how to invest:
- Find the right brokerage platform. There are dozens of platforms to choose from, each with different minimums, different exchange rates and different perks. Choose one with a low minimum and few (if any) transaction fees.
- Consider an IRA. Individual retirement accounts are designed to protect your investments from taxes in exchange for a later withdrawal rate. If you’re investing for the distant future, it’s a good idea to use one for your investments.
- Diversify your investment. No matter what assets or securities you choose to invest in, try to diversify those investments. Exchange-traded funds and mutual funds are good bets here.
- Minimize costs and fees. If you choose to invest in mutual funds, or rely on other financial services, choose options with minimal costs and fees.
Even if you have nothing to invest right now, there are options for you to generate the revenue you need and start building the financial future you desire. You can’t rely on get-rich-quick schemes, so it might be years or even decades before you start seeing your investments pay off, but you can’t let an empty portfolio deter you from building a substantial one.
