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This post was originally published in May of 2017. Here’s the new and improved version!
What do you think of when you hear “investor”?
For a lot of millennials, “investor” is a negative word. It’s a word to describe the 1% who are villainized as greedy, uncompassionate tax-evaders. And for a lot of millennials it’s a positive, but unachievable status. Like, sure it’d be cool to be an investor, but who has money to invest? Both groups usually picture someone like Warren Buffett when they think “investor” 🙂
I’m guessing very few of you hear “investor” and think “ooh, that’s me!”
But it can be you! And you can be one of the many good and noble investors. The kind of investor who is financially responsible without being greedy, gives back to important causes, and supports society by paying the taxes they legally owe. And to prove you don’t have to be rich to be an investor, we’re going to show you how to become an investor today with as little as $5!
The Difference Between Saving and Investing
Saving and investing are different, but they’re like best friends. They go together like wine and fruit 😉
“Saving” is setting aside money with no plan to spend it. “Investing” is putting that money into assets (stocks, bonds, real estate, etc), expecting the value of your money to grow.
You should have a savings account with some emergency money. That money doesn’t get “invested”. It just sits there waiting to help you out when some giant expense comes out of left field. Think car trouble, medical emergency, layoff, you know, all the horrible things we hope never happen to you, but you should prepare for just in case.
But you don’t want to keep all your money in this emergency savings. Why not? Well, because it’s not really doing anything. It’s earning minimal interest, so this money isn’t working for you, it’s just on-call. That’s why we recommend 3 different accounts to round out your savings and investments. To get your money working for you, you need to invest it.
Super important: You want to be a saver before you become an investor. Like learning to walk before you run. If you don’t already have an emergency savings, you should start there. We like high-yield online savings accounts like the one offered by Synchrony Bank because they have a reasonable interest rate (1.05%), there are no monthly fees, and you only have to keep at least $1 in the account (some accounts require a minimum of like $500!).
Focus on building up your emergency savings by transferring a small amount of each paycheck to this account (5-10%ish) until you have enough money in that account to cover all your expenses for at least one month. Then turn your focus (and that 5-10%ish of each paycheck!) toward becoming an investor!
It’s not the Account, but the Assets in the Account that Matter
A little infoon investment accounts in general before we show you how to become an investor today with just $5.
Having an investment account isn’t the part that makes you money. It’s the assets in the account that make you money.
Example: I have an investment account with Fidelity.com. Within that account, I have different assets. Assets can be stocks, bonds, Index Funds, ETF’s, whatever, or any combination of them all! Some assets perform better than others (ie, make me more money) depending on how the stock market is feeling on any given day.
This is where a lot of new investors panic. Opening an account is one thing. Choosing from thousands of different investments within that account is totally different. But these assets are where money is earned or lost, so we can’t ignore it. It’ll be ok though, we’re here to help you over this hurdle, and so are the newest financial service providers and online banks because they totally get it 🙂
How to Choose the Assets in Your Account
Our first word to the wise: don’t buy individual stocks or bonds unless you are an experienced investor. If you put $5 in Snapchat stock, and it flops (which, btw, it super did!), you’re SOL. This is why the financial world invented Funds, as in Index Funds.
Index funds are neat little packages of a bunch of stocks, bonds, or both. So if one or two or five of the stocks in your fund flop, you can still come out ahead if the other stocks in your fund do well. You know “don’t put all your eggs in one basket”? This is the investor version of that. Investors call it “diversification”. When you hear investors talking about “diversifying their portfolio”, they’re talking about investing their eggs in a bunch of different baskets. So you can explain to your friends that these Index Funds “offer automatic diversification”, and you’ll sound like a friggin genius!
How to Become an Investor Today with Just $5
So traditionally, banks and investment firms wanted people to pony up some big cash to open a new investment account. Like $500 min. But then the financial world realized it’s in everyone’s best interest to help young people start saving and investing with the little cash they have. I mean, the more savings each individual has, the less likely they are to need government assistance (read: Taxpayer Assistance!). So the financial world made low-minimum investment accounts available to the masses.
Let’s look at our two favorite ways to become an investor with just $5.
Acorns
Acorns is our winner for best newbie investor app!
It is a great way to save and invest without even feeling a save-and-invest pinch. Acorns takes all your bank card (debit card) transactions and rounds up your purchases to the nearest dollar, dumping that spare change in your investment account. So if you use your debit card to buy a $4.50 margarita at happy hour, Acorns rounds your purchase up to $5 and throws that 50 cent difference in your Acorns Investment Account.
50 cents doesn’t sound like much, but if you’re using Acorns for all your grocery, makeup, and coffee runs, it piles up. Like acorns being stored for winter…which is exactly the point!
Still, investing your spare change will only get you so far. To really see the benefits of investing, you can arrange automatic transfers from your checking account to your Acorns investment account every payday. These auto-transfers, of as little as $5, will be whisked away to your investment account before you even get a chance to spend that money, which is the key to guaranteed savings. If you haven’t already read our post on fool-proofing saving and investing, you totally should!
Acorns takes the guess-work out of selecting the assets in your account. It asks you a bunch of questions about your life and your goals, then recommends one of five asset mixes. You can take the recommendation or not. Either way, it’s nice for a new investor to see the options and the recommendation!
So what’s the catch?
Well, there are two catches, really.
First, the save-your-change-by-rounding-up-your-purchases feature requires you to use your debit card, so it won’t work with credit cards. If you use your debit card for everything, cool! You’re set! But if you put everything on credit cards, this feature doesn’t help because you don’t have enough debit card transactions to add up to any real savings. Of course the only reason you would be using a credit card for everyday purchases is to take advantage of the rewards program and pay off the bill in full every month, right? Like we did in our 3 credit card hacks. But credit card users can still benefit from automatically transferring money each payday.
Second, there is a fee of $1/month for accounts under $5,000 (and .25% of the account total for accounts over $5,000). I know that sounds like nothing, but if you only have $5 in your account, the $1 fee is 20%, which is crazy! To make this $1/month worth your while, you need to really use your account. Don’t just let Acorns do its round-up thing. Make extra contributions to your investments via the auto-transfers we talked about. 5-10% of your paycheck is a good starting point. Awesome side-note: Acorns wants to push the start-investing-young agenda, so they are offering to waive their fee for up to four years for college students. That’s potentially an extra $48 you can invest 🙂
Stash
Stashis our lovable runner-up in the newbie investor app contest.
Ithas the same fee structure as Acorns, but unlike Acorns, Stash does not round up your spare change on debit card transactions. Stash relies solely on transfers from your checking account. So you’ll want to make sure you have automatic transfers set up. Of course, these transfers can be as little as, you guessed it, $5!
The cool thing about Stash is that it offers asset packages based on social and environmental causes for those who want to invest in companies on a certain mission. If you are passionate about the environment, for example, you have the option to invest your Stash dollars in the Clean and Green Fund (which buys you shares of iShares Global Clean Energy). Or you could invest only in socially responsible companies, if you’re so inclined, with Stash’s Do The Right Thing Fund (iShares MSCI USA ESG Select Fund). Investing-by-mission maybe isn’t the way to maximize your money, but let’s be real: we’re looking for manageable, not maximized. If investing in a cause will make you feel good about investing so you actually follow through, you’re going to be way better off than if you avoided investing for fear of not making the “best” choices.
More Words to the Wise
- While Acorns and Stash are awesome ways to learn the investing ropes with very little cash, we would recommend prioritizing retirement investing before this dream investing. If you’re investing in a retirement account like a 401(k) or IRA, you’re still an Investor 😉
- We mentioned before that the $1/month fee is actually pretty high. However, this higher-than-normal fee can be justified for a newbie investor because these apps offer such a good intro to investing with good resources for learning the ropes. We recommend you pay the $1/month to get your beginner investing education. Then once you’re more comfortable as an investor, you should advance to something like Fidelityor Betterment. Neither Acorns nor Stash charge a fee to transfer your money out when you’re ready to level up.
So, what are you waiting for? Take your $5 and go become an investor today!!!
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