Wednesday, March 11, 2020

The Best Ways to Invest Just $100 Per Month This Year

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The 6 Best Ways to Invest Just $100 Per Month This Year  - The new year is the perfect time to ditch poor financial habits and pick up some new ones. Maybe you decided that this is the year you'll finally pay off high interest credit card debt, or perhaps you're using a budget for the first time in your life. Whatever your goals are, you probably know that it will take time and perseverance to get there. Read What is an investment? the best UK investment blogs For 2020

But how should you invest your money? If you have an extra $100 per month to spare, there's more than one way to build wealth and finally get ahead.

We reached out to financial advisors to find out how they would invest an extra $100 per month in the new year, and here's what they said. Read The Best Tools for Social Media Marketing Automation in 2020

How much can $100 per month really grow to be?

The 6 Best Ways to Invest Just $100 Per Month This Year
Here's where most articles will take the average return of the stock market -- between 9% and 10% per year -- and simply use that to show you how your money will make a straight line up over time.

While that's good for illustrative purposes, I'd like to show you exactly how your money would have grown over a real period of time.

Let's say that in January 1970 you started putting away an inflation-adjusted equivalent of $100 per month. We make it "inflation-adjusted" because $100 back then was a lot of money -- equivalent to $660 today -- and you invested that lump sum in the broader stock market (we'll get to how to do that below). Here's how that sum would have grown over time.

To put the importance of time in perspective, here's how much would be sitting in your nest egg if you started investing $100 -- adjusted for inflation -- over different time frames.

If you started investing (inflation adjusted) $100...Then your nest egg would have...
45 years ago (1972)$175,100
40 years ago (1977)$150,600
35 years ago (1982)$114,500
30 years ago (1987)$80,400
25 years ago (1992)$57,400
20 years ago (1997)$40,500
15 years ago (2002)$32,000
10 years ago (2007)$21,400
5 years ago (2012)$9,300
DATA SOURCE: AUTHOR'S CALCULATIONS. NEST EGG VALUES ROUNDED TO NEAREST $100.


Of course, saving and investing more than $100 would be nice -- but this isn't chump change either! Following the 4% safe withdrawal rule, a nest egg of $180,000 could provide $7,200 in annual income. When combined with Social Security, any pensions or other retirement plans, and part-time work, this could provide enough for you to call it quits on your day job.
The power of compounding

The real key behind all of this is the power of compounding. Simply put, this is means that you will get interest on your original investment. And then you'll get interest from your interest, and so on.

After adjusting for inflation, the stock market returns about 7% per year. That means the $1,200 you invest in year one will be worth $84 more in year two. When year three rolls around, that original sum will gain even more -- roughly $90 -- because the interest from the previous year will grow as well. That might seem like small stuff, but over time, the effects can be astounding.

Here's how much money you'd have, in constant dollars, if you start putting away $100 every month and earn a steady (note: it won't be steady in the short-run) 7% every year.
The 6 Best Ways to Invest Just $100 Per Month This Year

CHART BY AUTHOR. ASSUMES ANNUAL LUMP SUM INVESTMENTS GROWING AT 7% ANNUALLY. ALL FIGURES ROUNDED TO NEAREST $00.

For the first twenty years, the effects of compounding aren't all that impressive. But after that, the growth from your original investments is what becomes the true driver of wealth. By the time 50 years have past, you've contributed $60,000 inflation-adjusted dollars to your nest egg, but the effects of compounding have added another $462,000 to boot!

Am I ready to invest $100 per month?

No matter your age, however, there are a few boxes that need to be checked off before you're officially ready to start investing $100 per month. Specifically, you need to build up an emergency fund to provide for your basic expenses for at least three months with no income, and you need to pay off all high interest -- namely credit card -- debt. Failure to do either will only dig a deeper hole to climb out of.

Consider credit cards. Currently, the average interest rate on an unpaid credit card balance is above 16%. That means that the $1,000 balance you have yet to pay off will total $1,160 by next year if nothing is done. Crucially, the stock market -- on average -- returns 10.8% per year. That means even though your $1,000 investment could grow to $1,108 by next year, your debts will have increased at a faster clip!

While it's not mathematically the most efficient way to rid yourself of credit card debt, Dave Ramsey's debt snowball method has proven especially effective. The idea is that you pay down your smallest credit card balance first, and work your way up to the largest one. The psychological benefits from crossing each balance off your list give you the strength to carry through.

As for the emergency savings, it's crucial to understand how it will protect your investments. Most times, people need "emergency" money because they've lost their job. And most times, lots of people lose their jobs around the same time as economic contractions hit. And most times -- are you noticing a theme here? -- economic contractions happen at the same time the stock market tanks.

Think about it: if you have to tap your investments to pay rent or buy food, you'll be forced to sell stocks when they are at their lows. And when those stocks recover, you will no longer be participating in their rally. If, however, you have an emergency fund, you give yourself time to find other sources of income without having to panic-sell.

1. Bump up your 401(k) contributions

Colorado financial planner Mitchell Bloom of Bloom Wealth says your workplace 401(k) is a good place to start if your employer offers one, and particularly if you can qualify for an employer match. After all, an employer match you can qualify for is the closest thing to "free money" you'll ever receive at work, so you might as well take advantage.

You can strive to boost the percentage of your 401(k) contributions in order to funnel approximately $100 more into your account each month, but you may also be able to set aside a flat $100 in funds monthly if your workplace plan allows.

Either way, money in a 401(k) plan can grow tax-free and compound over time, and you won't have to pay taxes on distributions until you reach retirement age.

Also note that if you don't have a workplace retirement plan, all isn't lost.

Instead, you may want to "consider using a low-cost advisory firm like Betterment, where they will build a fully diversified globally allocated portfolio model with fractional shares so you can achieve diversification with a small investment amount," says Bloom.

2. Save $100 per month in a Roth IRA

Jeff Rose of Good Financial Cents says that consumers can also consider saving money in a Roth IRA if they meet requirements to contribute. While this type of account requires you to invest money that has already been taxed, your contributions can grow tax-free and compound until you reach retirement age. Once you're 59 ½ or older, you can withdraw money from a Roth IRA without paying income taxes, which is pretty sweet.

In 2020, most people can contribute up to $6,000 to a Roth IRA and traditional IRA account. However, individuals ages 50 and older can contribute an additional $1,000 for the year for a total of $7,000.

Income limits do apply, however. Married couples who file taxes jointly can't contribute to a Roth IRA if they earn over $206,000, and their contributions are phased out for incomes between $196,000 and $205,999. Single filers with incomes over $139,000 cannot contribute, and their contributions will be phased out for incomes between $124,000 and $138,999.
 

3. Save for emergencies

Also, consider saving for emergencies if you haven't already. Financial advisor Jake Northrup of Experience Your Wealth says that your emergency fund should include at least three months of living expenses, but potentially more.

You'll likely want to keep your emergency fund in an account you can access such as a high-yield savings account. While this means your emergency cash won't bring in a huge return, this money can literally save your finances if you face a surprise medical bill you can't pay or experience a job loss.

Further, having a fully funded emergency fund can also help you avoid charging up credit card balances with exorbitant interest rates.

4. Save for future healthcare expenses in an HSA


Financial planner Taylor Schulte, who is also host of the Stay Wealthy Retirement Podcast, says that assuming an emergency savings fund is in place and high-interest debt is paid off, the best place to put extra cash is into a Health Savings Account (HSA).

"The HSA is the magical unicorn of tax-advantaged investment accounts," he says. "Unlike any other account, they are triple tax-advantaged."


Schulte says this because you can invest up to certain limits on a tax-advantaged basis each year, then your money grows tax-free. When you take distributions in order to pay for qualified healthcare expenses, you won't pay taxes then, either.

There are some requirements in order to use an HSA, however, including the requirement that you have a high deductible health plan. For 2020, the Internal Revenue Service (IRS) defines a high deductible health plan as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family, notes Healthcare.gov. Also note that any high deductible health plan's total yearly out-of-pocket expenses must be less than $6,900 for an individual or $13,800 for a family.

Morgan Ranstrom, who works as a financial planner in Minneapolis, MN, says you should strive to keep enough cash in your HSA to pay your insurance's annual deductible in case of unexpected health costs, but beyond that you can invest the rest for long-term growth.

"With regular contributions, potential investment growth, and minimal withdrawals, you'll have an account that may be used to fund medical expenses in retirement without tax penalty," he says. "How great is that?"

5. Pay off high interest credit card debt

While you may not consider debt repayment as an investment, the financial return can work similarly. Note that any debt you pay off is no longer charging an outrageous interest rate, and that means more money in your pocket each month that you can save or invest for the future.

Debt expert Chris Peach, who teaches consumers how to pay off debt through his Awesome Money Course, says you should check to see the interest rate you're paying on your credit cards, keeping in mind that the average credit card APR is well over 17%.

"For most people, getting an 18% return on your investment every year is more like a dream come true than a reality," he says. Fortunately, you can achieve that return by paying off high interest debt and saving the money you would normally pay toward interest each month.

Let's say you have a credit card balance of $10,000 at 18% APR and you've been making minimum payments on this card for years. Making the minimum payment of $200 each month would take you another 94 months to pay off the balance, which also results in $8,622 more in total interest paid, notes Peach.

But what if you were able to invest $100 per month as an over payment on your credit card?

"Though it may not sound like a ton of money, $100 more per month will pay the balance off 47 months earlier and saves almost $4,000 in interest," says Peach. "Not bad for a $100 monthly investment if you ask me."

6. Invest in yourself

Fee-only financial advisor Russ Thornton, who focuses on providing retirement planning for women, says an investment in yourself can also pay off in a big way. "This could be used to buy books, audiobooks, online courses, offline courses, professional associations, personal training sessions, or something else," he says.

If you acquire new or deeper knowledge that could help you perform your job, it could help you get a bigger raise or even a promotion, whereas learning a new skill could help you create a side hustle that could ultimately help you bring in more income.

You could even get involved with a professional association or networking group to build your network, says Thornton. "This could help with your current career or might open doors to new opportunities — both personal or professional."

Investing can change your life for the better, and the sooner you start, the more you'll have in your investing account in the long run. But many people mistakenly think that unless they've got thousands of dollars lying around, there's no good place to put your money.

The fact is that even if you only have a small amount of money, you can start investing. In this article, you'll learn about five great ways to invest a few hundred dollars. By choosing the one that appeals most to you based on your risk tolerance -- or by mixing and matching multiple ideas -- you can get on the path toward long-term financial security and build up a nest egg that you'll be able to tap whenever you need it.

Our 5 best ways to invest $100

If you've managed to save up $100, here are our five best suggestions for what to do with it:

1. Start an emergency fund

It's understandable if your first thought was to start by taking your $100 and buying small amounts of stock. After all, there's a lot of compelling evidence that investing in stocks is the best way for regular people to attain financial independence. But a lot of people don't understand how important it is to also have a strong margin of safety with their finances. For most of us, the best way to get that margin of safety is by having cold, hard cash.

If you don't already have three to six months' worth of living expenses set aside -- maybe even more if you have a family and a mortgage -- then the best place for you to start with that $100 per month is putting it in a savings account as an emergency fund.

With an emergency fund, you can't expect much of a return on your savings. Having that safety net isn't about getting returns; instead, it's about keeping you from going into debt or having to tap your long-term investment accounts if you have a financial emergency.

This is especially true if you were to lose your job, or suffer an unexpected illness or accident that impacts your income for weeks or even months. Having several months of income available in cash will mean that life's unexpected events won't end up affecting your financial plans. Interest rates on savings accounts aren't very high, but this is about protecting your downside -- not capturing high returns.

2. Consider using a robo-advisor to select investments for you

Once you have financial emergencies covered, you're in a much better position to start investing. If you like a fully automated approach that requires as little effort as possible, then using a robo-advisor can be just what you're looking for.

Robo-advisors use apps or internet websites to learn about your financial needs and then come up with an investing strategy to meet them. They'll often use basic information like age, family size, income, and risk tolerance to tailor a portfolio to your needs. Robo-advisors then handle all the details of selecting investments, making purchases and sales, and keeping you informed.

Here at The Motley Fool, we strongly believe you can earn better returns by handling your own investments. But many robo-advisor algorithms do a good job, and you're likely to get better long-term results from robo-advisors than if you never invest at all. Read How To Get Started Invest Money, Investing for Beginners 2020

3. Invest in a stock index mutual fund or exchange-traded fund

Putting your money into a stock index mutual fund or a low-cost exchange-traded fund is a great way to start investing with just a little money. Both of these investment vehicles give you diversification by letting you buy small amounts of many different stocks with a modest investment. You can choose from a wide range of stock indexes, ranging from popular ones like the S&P 500 or a more specialized index.

There are some differences between mutual funds and ETFs, including how you buy and sell shares, what minimum investments apply, and what fees you can expect to pay. But the general idea behind both ETFs and mutual funds is to let you invest in the whole market or in selected parts of it through a single investment.

Once you've built up a solid foundation in these index-tracking funds, you can then branch out and explore other investing options. But an index-tracking fund might well be all you'll ever really need in order to succeed with your investing.

4. Invest in individual stocks through a brokerage account

Thanks to the recent move toward commission-free stock trading, buying individual stocks with just $100 a month to invest is now a cost-effective option to start investing. To start investing in individual stocks, you'll just need to open an investment account with a brokerage company and start making regular deposits of your $100.

Finding stocks for your portfolio can seem daunting, but you can follow some simple principles to help you get started. First and foremost, don't invest in any company whose business you don't understand. By sticking with familiar companies, you'll be better able to tell when they're doing well and when they're doing poorly. Choosing a portfolio of at least 10-12 stocks will reduce the risk of big losses if you make a poor choice with one or two of your stock picks, and avoiding stocks that make big moves in both directions is also smart when you're first getting started. Over time, you'll learn what to look for in company financial statements, and as you learn, you'll be even better able to separate out strong stocks from weaker ones.

Individual stocks give you a chance to outperform the broader market averages over the long run. When you're talking about years or even decades of holding quality stocks, the benefits of investing in the best companies in the stock market can pay life-changing rewards to long-term stock investors. Even a single share can grow over the years to become worth a huge amount and help you reach your financial goals.

5. Open an IRA

Finally, the type of account you choose to invest in can be even more important than what you choose to invest in. If you're planning to invest $100 per month, you should consider doing it in a tax-advantaged account like an IRA. Either a traditional or Roth IRA can give you valuable tax benefits.

Using IRAs can produce huge tax savings over the long run. For example, let's say that you stash $100 a month in a Roth IRA for 30 years. Based on the S&P 500's historical performance, you could end up with a nest egg of nearly $180,000. If you are in the 24% tax bracket at retirement, having this money in a Roth IRA could mean $43,200 in tax savings -- and that doesn't even consider the dividend and capital gains taxes you didn't have to pay along the way. If you really want to push yourself to save more, you can put up to $6,000 into an IRA each year for 2019 and 2020 -- or up to $7,000 if you're aged 50 or older.

The takeaway is that any of the choices presented here will earn you much more from your $100 monthly investments if you keep them in the right kind of account.

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