Investing is an important part of long-term financial planning, helping you to achieve such goals as sending your children to college and having enough money for a comfortable retirement. Many people don’t begin investing as soon as they should, mistakenly thinking that they need at least a few thousand dollars to get started. This is a common misconception.
In fact, you can start investing with just $500, putting that money to work for you instead of parking it a bank account that doesn’t even offer enough interest to offset the real rate of inflation. One of the fundamental rules of investing is not to invest money that you cannot afford to lose. If you don’t have $500 that meets that description today, here’s a simple way to find it.
Designate a piggy bank or jar as your investment fund savings. Skip that cup of coffee on the way to work. Instead, take a cup from home and drop that money right into your piggy bank on your way out the door. Put the money you usually spend on lunch in the piggy bank and take a brown bag lunch to work with you. Cancel your cable television and add that money to your investment savings each month. You can get a library card and borrow movies and audio books for free.
When you make those types of changes in your consumer spending patterns, you may end up surprised by how quickly you accumulate $500 in that piggy bank. It meets the requirement of being money you can afford to lose since, in a way, that money was already lost, via consumptive rather than productive spending. You can put that money to far better, more productive use by working to grow it through smart investments.
As with anything that you do with your money, make informed investment choices. Always read up on companies you’re thinking of investing in or groups you’re considering investing with. Ask questions, perhaps even take a class or two at your local community college, until you understand the financial principles involved in financial planning and investing. Even if you are working with a money management professional, at the end of the day, you are responsible for your own financial well-being.
Stocks That Pay Dividends
Quarterly dividends are not just for rich folks. You can buy stocks in companies that pay out quarterly, biannual or annual dividends, typically between 2 and 3 percent of the stock’s worth for stocks that are performing fairly well. And, there’s even an app for that, a few apps actually, including Robin Hood and Acorns, helping you to make low-cost and even no cost trades.
E-trading, even among the old names in the business, like Charles Schwab and Fidelity, is a thing now, driving down stock trading costs. Fees used to be much higher than they are today, sometimes costing hundreds of dollars. Now, even the biggest names offer low trading fees, some as low as $10 per trade, a sum well within the range of even the budget-bound stock trader.
Investing in this type of stock is all about developing multiple streams of income, a key element of financial security. Dividend paying stock can be a valuable part of your retirement planning, particularly if you are in that final decade before retirement. During your primary earning years, you may want to view dividends as a way to increase your investment funds and add to your savings.
As with any investment opportunity, investing in dividend paying stocks does involve risk. Rising stock values can push dividend amounts upward, but stocks also fall. However, it is also important to bear in mind what the experts have long said about stocks, that stocks should be thought of more as long-term investments, not as a quick return investment.
A given stock will fluctuate over time. That is the nature of the market. There may be short-term losses, but when running the loss-gain numbers over time, a different picture often emerges, revealing higher gains than losses. Of course, sometimes a company just crashes and burns, leaving unhappy stockholders bemoaning their losses in its wake.
This is why diversification of your investment portfolio – or, in plain language, not putting all of your eggs in one basket – is important. When you have a variety of investments, if a few fail, your other better performing investments can cover those losses and still result in some gains. If your money is concentrated in one or two investments and one or both goes bad, you’re likely to sustain significant losses.
For $500 you can get a surprising variety of dividend paying stock. During the past year, AT&T stock price has ranged between $32.07 to $37.48 per share. Cracker Barrel Old Country Store Inc. stock has been between $96.01 to $159.94 over the past 12 months and, during the same period, Johnson & Johnson has fluctuated between $95.10 to $109.49 per share. Their current dividend payout is at 3 percent and has been rising steadily during the past 35 years.
Those Johnson & Johnson numbers hold a powerful stock-picking lesson. Don’t worry about choosing sexy, flashy stocks. As a beginner or small budget investor, concern yourself instead with choosing steady, reliable stocks, solid performers with a proven track record of reported gains and respect for stockholders. The list of dividend paying stocks is an easy Internet find, so start doing your company research now to be ready to make smart stock buys when the time comes.
Grow Your Money By DRIPs And Drops
Dividend reinvestment plans (DRIPs) are another practical way to invest $500, offering specific advantages to the beginning investor working with budget constraints. Primarily offered directly by the companies themselves, although some brokers do offer a form of this plan, sometimes called a synthetic DRIP, these investment plans are a great way to start building an investment portfolio. Instead of cash dividends, DRIP plans reinvest earnings into the purchase of more stock.
In addition, many of the companies that offer DRIP plans also offer investors the option of buying stock above those that dividends provide. Investors can set a dollar amount to purchase more stock monthly or quarterly. That amount typically doesn’t have to be much, as many companies offering this type of stock purchasing option allow for the purchase of fractional stocks.
When investing via DRIPS, it is still important to keep diversification in mind, otherwise you’ll end up with far too many eggs in a single investment basket for safety. You’ll want to include a handful of DRIP plans in your portfolio to avoid overexposure potentials. As always, do careful research before involving your money in any company.
Be sure to check out which companies offer DRIP plans on a regular basis, as the list can and does change often. Many of the biggest, most well known international corporations offer DRIPs, including Coca Cola Enterprises, Inc., Campbell Soup Company, Nestle SA and the Boeing Company. There are lots of lesser known companies offering DRIP plans as well, such as Omnicare, Inc., Nextera Energy, Inc. and Ecolab, Inc.
Go Pro With Low-Cost Exchange Traded Funds
Exchange traded funds (ETFs) can be described as an index fund-mutual fund hybrid. These professionally managed investment funds, made up of stocks, commodities and bonds, are also traded like stocks, expeiencing price gains and losses. Their typically low fees, just under 0.05 percent, are just one feature that makes ETFs an attractive investment option. Exchange traded funds are a tax-efficient investment and have diversification built right in.
Another positive feature for the new investor is that some of the biggest names in the financial industry offer and manage these funds, including the Vanguard Group, Charles Schwab and Fidelity. There is a wide selection of ETFs, including an array of low-cost and even no-cost ETF options. However, even though these are professionally managed investment funds, ran by experienced financial professionals, you still need to perform your due diligence before turning over any of your money.
Look at the average performance and return over time and find out as much as possible about the investments that make up the fund. See if you can figure out from financial, economic and political circumstances why a particular stock, commodity or bond was included in the fund. Such exercises will help to improve your investment skills. And, remember, even though these are professionally managed investment funds, there is still risk involved and losses can occur.
It’s Never Too Soon
It is never to early to start investing with your future financial security in mind and there’s no need to put it off until you’ve saved up a large lump sum. That just leads to procrastination for many and to wasting time during your most productive earning years. Most people underestimate by far what they’ll need for a comfortable retirement, to say nothing of the costs associated with home ownership and child rearing. In today’s economy, where job security is but a memory for many, financial security is built upon multiple streams of income. Investing can help you to achieve that, so get started with that $500 today.