Micro Investing: Finding Small Ways to Start Saving
July 2018
Artists and other freelancers often avoid implementing a savings and investing plan by relying on the excuse of not having enough extra money to do so. This misguided premise that vast quantities of money are needed to start a solid, diversified investment portfolio provides the cover to procrastinate on saving and to avoid bringing financial wellness into their lives. However, discovering ways to invest small amounts of money consistently will help to establish financially healthy habits and to begin to grow a stable, diversified portfolio.
One of the newer investment strategies available to first-time investors utilizes robo-advisors. When opening an account with this technology, an investor answers a series of questions that helps to define some of their investment criteria and goals, such as risk tolerance, time horizon and purpose. A computer algorithm—the robo-advisor—then determines the portfolio best-suited to the investor. One company that uses robo-advisor technology and is affordable for people with limited investable cash is Betterment. With this independent online advisory service, there is no minimum balance to open an account and additional contributions of as low as $10 can be made. Their 0.25% maintenance fee is also reasonable when compared to other types of managed funds. The investment portfolio designed by the robo-advisor is typically a mixture of stocks and bonds, so it provides immediate diversification even with the low required investment amounts.
Mutual funds are also vehicles in which diversification can be quickly and easily gained. Unfortunately, many mutual funds have minimum initial investment requirements—around $2,500 to $3,000 — which can discourage many people with more modest resources from acquiring them. Several mutual fund families, however, offer a limited number of funds that are less pricey. Charles Schwab, for example, offers a small selection of funds—listed as their OneSource funds—which allow an account to be opened with a minimum initial investment of $1 and subsequent additional contributions of only $1. Another mutual fund provider, USAA financial services company, has a selection of funds that have a $500 minimum investment threshold and $50 additional investment requirements. They also offer other funds that can be opened with only $50 if a commitment is made to contribute $50 each month until a minimum threshold is met. Many mutual funds also have lower investment requirements if they are held in a retirement account, such as an IRA.
Treasury securities are considered to be one of the safest bonds that you can hold, since they are issued and guaranteed by the U.S. government. Fortunately, they are also extremely easy and affordable to buy directly through their website treasurydirect.gov. Savings bonds, which are held in the owner's name and accrue interest, can be obtained for a minimum of $25 and then in one cent increments thereafter. The Series I savings bond—whose interest rate is inflation indexed—bore an interest rate of just over 2.5% recently, which is far higher than the interest rate on most cash accounts. Treasury Bills, Notes and Bonds, which are tradable and pay interest directly to the holder are also available with a $100 minimum purchase amount and $100 additional increments. In addition to the low requirements to own them, another key benefit of buying treasury securities directly is that no fees are charged for doing so.
Buying shares of individual companies or Exchange Traded Funds ('ETFs') can seem expensive, as there are typically commissions charged on all trades facilitated by brokers. This usually necessitates purchasing a larger number of shares, as the more shares you purchase the lower the per-share commission charge will be. However, Robinhood brokerage, charges no commissions on trades. They also have no minimum amount required to open an account with them and offer the ability to add additional funds to an account in any amount. Therefore, buying only a few shares or ETFs—or even just one—is as cost effective as buying multiple shares since there is no trade commission allotted to them. There are some restrictions with Robinhood accounts to be aware of, such as on the number of transactions that can be made in a given time frame, and much of the research on potential investments is borne by the investors themselves.
Believing that investing requires large amounts of money to begin and sustain is an often-used excuse to delay taking action to promote financial wellness—and may be also used to avoid facing the fear of implementing an investment plan. While the lower cost options typically do not provide the level of education and service of those that have higher investment thresholds and fees, they provide an easy and affordable way to start building a diversified portfolio. For artists and other freelancers—who often don't know how much investable cash they will have from month to month—these can be convenient and attainable solutions. In addition, for those just starting to test the investing waters, the ability to commit small amounts of money can help to allay the fear that may come from investing larger amounts.