If you only have a small amount of money to invest each month, you might wonder, why bother?
But here’s the thing.
Investing small amounts of money, especially at a young age, is certainly worth it. Due to compound interest, small investments that are properly managed can grow into a sizable amount of money. For example, if you invest $100 a month from age 31 to 65, at a 10% average return, you’ll have $379, 664 by the time you turn 65.
Crazy isn’t it? Your total investment over those 35 years was only $42,000. In other words, you’ll have made $337,663.
Is that amount of money worth it to you? It certainly is to me!
In the next section of this article, we will further elaborate on why investing small amounts of money is worth it by discussing compound interest and how it works.
What is Compound Interest?
While I would normally give some sort of definition of compound interest here, I am going to try and explain it to you myself – scary thought I know.
First off, the term “compound interest” can be a little misleading because stocks don’t earn interest. They can generate dividends and capital gains – but not interest.
For some reason though, the growth of a stock portfolio over a period of time is often credited to “compound interest”. I don’t get it, but I just go with it.
As an FYI, I may refer to compound interest as “compound growth” throughout the article.
Okay, moving on. Compound interest is often referred to as interest on your interest. Or growth on your growth.
So for example, if you invest $1,000 in a stock and nothing more, the dollar value of a 10% return will consistently grow and compound over time.
In the first year, a 10% return on $1,000 will be $100.
In the second year however, that 10% return is based on $1,100 ($1,000 + $100), so your return in year two will be $10 more than your previous year’s return.
And so on and so forth. Below I have included a table that will show you how this scenario plays out over a 35 year period.
So as you can see, this small $1,000 investment grew to $28,102 over the course of the 35 years despite no additional investments.
In today’s day in age, you are going to need more than $28,000 to retire with – but remember this amount was accumulated off of a one time $1,000 investment with no other funds added.
The total return on this investment is $27,102.
What if you decided to add $100 a month to this investment? Well then your total after 35 years will be $367,981.
Think about that for a second. Your $42,000 ($1,200 year x 35 years) additional investment increased your return by almost $340,000.
Again, is that worth it to you?
If you can find $100 a month in your budget to invest, I strongly recommend you do it.
Compound interest is a very powerful force, but you need to get the ball rolling first. If you only have a small amount of to invest, that is totally okay, but make sure you invest it.
Don’t think it won’t make a difference, because as shown and discussed above, IT IS WORTH IT.
But hey, don’t take my word for it, check out what Albert Einstein had to say about Compound Interest.
He was a decently smart guy, right?
How to Invest with a Small Amount of Money
Okay, now you know that investing even a small amount of money is certainly worth it in the long run.
All you need is a little money, time and average market returns. It’s not complicated!
But how exactly should you invest money when you only have a small amount of it? Astute question – allow me to give my two cents.
If you only have a small amount of money to invest, buying ETFs or Mutual Funds is a great option for you. By doing so, you’ll be able to easily diversify your portfolio with only a few investments.
With that said, this also depends on what your investment goals are. If your goal is to generate 25% returns for the next 3 years, a well diversified portfolio is likely not your best option. You’ll need to invest in growth stocks and bet on the company’s success, a far riskier option.
However, for the purpose of this article, I am assuming you’re looking to invest for the long term – and for that reason, I would personally recommend more diversification.
What is a Mutual Fund
A mutual fund is a professionally managed investment fund that includes money from numerous investors.
If you invest in a mutual fund, you are likely investing in a wide range of securities. Before choosing a fund to invest in, make sure you look at the funds facts.
I will include a link here to show you what a prospectus looks like.
The main thing I would analyze here is the historical performance of the fund.
Furthermore, check out the MER fee and make sure it isn’t too high. Because these funds are professionally managed, fees can get quite pricey.
Lastly, look at the funds holdings. What companies are you investing in exactly? Do you want to invest your money with these companies?
How Can You Buy Mutual Funds
For one, your bank will likely have an investment branch, and they will gladly help you invest in mutual funds.
For example, here is a list (include link) of all Scotiabanks Mutual funds.
While this may be a good option, be careful not to be lured into investing into funds just because a financial advisor at your bank recommends it.
Quick Note #1 – Financial Advisors are often sales people too, the more money they get you to invest, the more they make. Remember that.
Additionally, there are financial institutions out there such as Assante Wealth Management, Fidelity and SunLife Financial that also issue mutual funds to investors.
What is an ETF?
An ETF is very similar to a mutual fund, but unlike mutual funds, ETFs are traded on stocks exchanges.
Think of an ETF as a mutual fund that trades like a stock.
ETFs often track indexes such as the S&P 500. By tracking a specific index, ETFs are often passively managed which results in a much lower management fee.
Similar to a mutual fund, before choosing an ETF to invest in, look at how the ETF has performed over time, look at the fees associated with buying the ETF and make sure you have a general understanding of what companies you’re investing in within the ETF.
How Can You Buy ETFs
If you’ve ever bought a stock before, you buy ETFs the same way.
If you choose to invest your funds in ETFs, you can do this through brokerage accounts such as Robinhood or Questrade.
An alternative to this would be to invest your money with a Robo-advisor.
Robo-advisors are software companies that invest their clients money with the use of high tech algorithms and advanced automation – as opposed to human decision making.
Popular Robo-advisor companies include Wealthsimple, Betterment or Wealthfront.
To conclude, investing in small amounts of money is definitely worth it. Due to compound interest, small investments can lead to big returns over time.
If you’re like me, investing is all about the long term. I don’t need home run returns, a steady 8%-10% return over the course of my life will make me rich, and that’s why I like diversification.
But if you only have a small amount of money to invest, you won’t be able to properly diversify your portfolio if you’re buying individual stocks or bonds, it’ll just be too expensive.
That’s why I recommend investing in mutual funds and ETFs if you only have a small amount to play with.
But even if you have more money to invest later on in life, these financial vehicles are still great options for you.
Before putting your money down though, do a little bit of research. You don’t have to spend days on end with this, but definitely give yourself a few hours to look through things like:
- Past Performance
Lastly, it’s never a bad idea to get a non-bias second opinion before making any investments.
Your financial advisor might be great, but they also might be blinded by the big commission checks they’ll earn for getting you to invest an extra $5,000.
Okay, that’s about it for me, but I urge you to start investing, small or big, just get started.
Get that snowball rolling and watch it go.