INVESTMENT & INSURANCE
7 Easy Ways To Start Investing With Little Money
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How Much Insurance Should You Have?
Insurance helps you sleep at night knowing that, no matter what happens, your family is protected. But how much insurance do you really need?
There are insurance policies that can cover virtually everything we have and everything we do in life. But how much insurance coverage is enough? And how much might be too much?
There’s no easy answer, but there are general rules of thumb that you can follow. What those rules are will vary depending upon the type of insurance coverage is involved. Here are six categories of personal insurance to consider coverage amounts for.
When it comes to life insurance, there’s a variety of metrics used to determine how much you will need. And which metrics will be used can depend largely on who’s asking the question.
For example, a life insurance agent—who may be looking to sell you the largest policy possible—may base the death benefit on a multiple of your annual income. He or she may say that you need a policy that is equal to 10 or 20 times your annual income. The theory here is that you will need an amount of life insurance that will replace your income completely for a specified number of years. This may be defined by the number of years that will take for your youngest child to finish college, or for your spouse to retire.
You can also use very specific financial objectives. For example, you can tie the amount of life insurance to the amount of debt that you and your spouse owe. If this includes your mortgage, student loans, car loans, and credit cards, it could result in a very large reduction in the family’s monthly expenses, that will come close to replacing your income.
We discuss how much life insurance you should have specifically in this post, and we’ve also put together a simple life insurance needs calculator to help you crunch the numbers yourself.
Regardless of how much you need, the good news is that term life insurance is very inexpensive, especially when you’re young.
Policygenius is the best place to look for life insurance. They let you shop around for multiple quotes from a variety of lenders. They also now offer term life insurance with no medical exam needed.
They’ve partnered up with Brighthouse SimplySelect℠ to offer up to $2 million in coverage – and they promise low premiums. After you answer an over-the-phone questionnaire with a Policygenius agent, you can get your policy all squared away in just three to four days!
This question is actually no longer relevant, since the Affordable Care Act (ACA) effectively removed annual and lifetime limits on benefits from health insurance policies purchased on the health insurance exchanges and provided by employers.
The bigger question in regard to health insurance is how much your out-of-pocket limits will be based on a specific policy. Most people are very familiar with deductibles, but those are not the only expense you need to be concerned with.
Most policies also have in out-of-pocket maximum, which can be more important. This is the combination of the deductible plus coinsurance provision. Coinsurance is your responsibility to contribute toward health care expenses that exceed your deductible. For example, if the plan has a $5,000 deductible, but it also requires that you pay 20 percent of the expenses that exceed the deductible—up to $10,000—you will be on the hook for an additional $2,000 ($10,000 * .2).
That means that your total out-of-pocket costs will be $7,000 ($5,000 + $2,000) in any one year.
The necessary amount of auto insurance that you need is easier to determine. That is at least partially because there are required minimum amounts of coverage in each state. Those requirements determine the least amount of coverage that you should have.
Auto insurance coverage amounts are usually expressed by a sequence of three numbers. For example, the state minimum requirement of 50/100/25 means that you are required to have a minimum of $50,000 in coverage for each person injured in accident (bodily injury), up to a maximum of $100,000 per accident (two people), and $25,000 coverage for property damage.
From a standpoint of legal compliance, you are covered if you meet your state mandated minimum amounts. And that is a sufficient amount of coverage if you are young and have little or no assets.
On the other hand, if you have home equity and/or investments worth more than your state’s minimum required liability amounts, you want to increase your coverage. One of the major purposes of any type of insurance is to protect your assets. In the case of auto insurance, you should have sufficient coverage to protect your assets if you are sued as a result of an accident where you were at fault.
The more coverage that you have, the less likely it is that a plaintiff will go after your personal assets. If possible, you should want your coverage to be equivalent to your personal assets.
Finally, keep in mind that comprehensive and collision insurance is optional. If you have an older car that’s not worth much, you can knock a bit off your car insurance bill by removing this coverage, but then you won’t be reimbursed if your car is totaled or stolen.
There are a lot of factors that go into a homeowners insurance policy, and determining how much coverage you need is a highly mathematical process. It will also be based on the specific numbers associated with your property and with its contents.
To begin with, you have to insure the physical structure of the property. The best way to do this is through a guaranteed replacement cost policy. Under such a policy, the insurance company will pay the full cost to rebuild your home in the case of a total loss. This will require that you get an accurate estimate of what it costs to replace the home, in order to determine how much coverage you will need. This can be very different from the property’s appraised value. For example, replacement cost does not include the value of the land, since that cannot be replaced.
Your homeowners insurance policy should also include contents coverage. This will include everything is inside your home that is not affixed to the physical structure of the home. You can do a detailed inventory of the contents of your home, but more commonly the insurance company will assign an estimated value, generally 50 percent or more of the replacement cost of the home, to cover the contents.
If the guaranteed replacement cost of your home is $300,000, $150,000 would be added to cover the contents of the home.
Renters insurance covers your property in the event it is damaged or stolen. (Many people don’t realize that if your apartment were to burn down, your landlord’s insurance won’t cover your stuff!) Renters insurance is so cheap, everyone should have it.
Renters insurance is less complicated than homeowners insurance because your only concern is with the contents of your home. You don’t have to worry about four walls, the exterior of the building or anything else that has to do with the physical structure of the property. That means that you need a lot less renters insurance than if you are a homeowner and need homeowners insurance.
You can do a rough estimate of how much insurance you will need, simply by using a per room estimate, and then making adjustments for certain high-cost items. For example, if you live in a six room home, you can assign $5,000 per room, for a total of $30,000, but then add extra to cover jewelry, computers, personal heirlooms and the like.
It can be easy to go a little bit high on renters insurance because it’s relatively inexpensive. But just keep in mind that you have to have an inventory—complete with photos—of everything you’re insuring, in order to have a claim fully paid.
Investing even very small amounts can reap big rewards. Here are 7 ways you can start investing with little money today.
For many people, the word “investing” conjures up images of men in suits, monitoring the exchange of millions of dollars on a stock ticker.
I’m here to tell you: You don’t need to be the Wolf of Wall Street to start investing. It’s okay if you’re more of a mouse of Main Street. Even if you only have a few dollars to spare, your money will grow with compound interest.
The key to building wealth is developing good habits—like regularly putting money away every month. Swap out the barista-made cappuccinos for coffee at home and you could already be saving more than $50 a month.
Once you have a little money to play with, you can start to invest.
In 2020, you can get a date, a ride or a pizza with the swipe of a smartphone screen. Investing is no different. If you can automate your bills, why not your investments? It’s just as easy.
With a robo-advisor or savings account, you can make your money work while you play. With a stock trading app, you can play with a little money and learn valuable investing lessons at the same time. Just like Halloween costumes, investing comes in many different forms. It shouldn’t be a scary word.
With so many different options, investing for beginners is simpler and more straightforward than ever before.
Soon you’ll see how addictive growing your money can be.
Here are seven simple ways to get there:
1. Try the cookie jar approach
Saving money and investing it are closely connected. In order to invest money, you first have to save some up. That will take a lot less time than you think, and you can do it in very small steps.
If you’ve never been a saver, you can start by putting away just $10 per week. That may not seem like a lot, but over the course of a year, it comes to over $500.
Try putting $10 into an envelope, shoebox, a small safe, or even that legendary bank of first resort, the cookie jar. Though this may sound silly, it’s often a necessary first step. Get yourself into the habit of living on a little bit less than you earn, and stash the savings away in a safe place.
The electronic equivalent of the cookie jar is the online savings account; it’s separate from your checking account. The money can be withdrawn in two business days if you need it, but it’s not linked to your debit card. Then when the stash is large enough, you can take it out and move it into some actual investment vehicles.
Start with small amounts of money, and then increase as you get more comfortable with the process. It may be a matter of deciding not to go to McDonald’s or passing on the movies, and putting that money into the cookie jar instead.
2. Let a robo-advisor invest your money for you
Robo-advisors entered the investing scene about a decade ago and make investing as simple and accessible as possible. You don’t need any prior investing experience, as robo-advisors take all of the guesswork out of investing.
Robo-advisors work by asking a few simple questions to determine your goal and risk tolerance and then investing your money in a highly-diversified low-cost portfolio of stocks and bonds. Robo-advisors then use algorithms to continually rebalance your portfolio and optimize it for taxes.
There’s no easier way to get started in long-term investing. Most robo-advisors require just $500 or less to start investing and charge very modest fees based upon the size of your account. All offer automated investing plans to help you grow your balance.
If there’s any downside to Robo-advisors it’s cost. Robo-advisors charge an annual fee equal to a small percentage of your balance. The industry average is about 0.25%. So, if you invest $10,000, you’ll pay $25 a year. That’s not a lot of money, but it begins to add up if you amass hundreds of thousands of dollars.
It’s important to note that robo-advisors fees are on top of the fees charged by the exchange-traded funds (ETFs) that robo-advisors buy to make up your portfolio. You can avoid paying the robo-advisor fees by building your own portfolio of ETFs or mutual funds. For the vast majority of investors, however, that’s a lot of additional work and responsibility.
The bottom line? Robo-advisors are cheap and well worth it.
3. Start investing in the stock market with little money
When it comes to investing in the stock market, cost is often the barrier to entry. It takes money to make money, right?
Not anymore. The internet has made it easy for consumers to get started with very little upfront money. That means you can put a few dollars in to familiarize yourself with investing before making a bigger commitment. It’s a great way to learn about investing while putting very little money at risk.
Today, there are increasing numbers of options that have swung open doors to a new generation of investors – letting you get started with as little as $1 and charges no trade commissions.
In the past, stockbrokers charged commissions of several dollars every time you bought or sold stock. That made it cost-prohibitive to invest in even a single stock with less than hundreds or thousands of dollars. In fact, $0 commissions across comp have been so successful they’ve disrupted the entire investing industry and forced all the major brokers – from ETrade to Fidelity – to follow suit and drop trading commissions.
Plus the ability to invest in companies with fractional/partial shares is a complete game-changer with investing. With fractional shares, it means you can diversify your portfolio even more while saving money. Instead of investing in a full share, you can buy a fraction of a share. If you want to invest in a high-priced stock like Apple, for instance, you can do so for a few dollars instead of shelling out the price for one full share, which, as I write this, is around $370.
4. Dip your toe in the real estate market
Believe it or not, you no longer need a lot of money (or even good credit) to invest in real estate. A new category of investment known familiarly as “real estate crowdfunding” makes it possible to own fractional shares of large commercial properties without the headache of being a landlord.
Crowdfunded real estate investments require larger minimum investments than robo-advisors (for example, $5,000 instead of $500). They’re also riskier investments because you’ll be putting that entire $5,000 into one property rather than a diversified portfolio of hundreds of individual investments.
The upside is owning a piece of a real physical asset that’s not necessarily correlated with the stock market.
As with robo-advisors, investing in real estate via a crowdfunding platform carries costs that you wouldn’t pay if you bought a building yourself. But here, the advantages are obvious: You share the cost and risk with other investors and you have no responsibility for maintaining the property (or even doing the paperwork to buy it!)
I think real estate crowdfunding can be an intriguing way to learn about commercial real estate investing and also diversify your assets. I wouldn’t lay all of my money on these platforms, but they do make an intriguing alternative investment especially in these times of unprecedented market volatility and pitiful bond yields.
5. Enroll in your employer’s retirement plan
If you’re on a tight budget, even the simple step of enrolling in your 401(k) or other employer retirement plan may seem beyond your reach. But you can begin investing in an employer-sponsored retirement plan with amounts so small you won’t even notice them.
This is one step that everybody should take!
For example, plan to invest just 1% of your salary into the employer plan.
You probably won’t even miss a contribution that small, but what makes it even easier is that the tax deduction that you’ll get for doing so will make the contribution even smaller.
Once you commit to a 1% contribution, you can increase it gradually each year. For example, in year two, you can increase your contribution to 2% of your pay. In year three, you can increase your contribution to 3% of your pay, and so on.
If you time the increases with your annual pay raise, you’ll notice the increased contribution even less. So if you get a 2% increase in pay, it will effectively be splitting the increase between your retirement plan and your checking account. And if your employer provides a matching contribution, that will make the arrangement even better.
6. Put your money in low-initial-investment mutual funds
Mutual funds are investment securities that allow you to invest in a portfolio of stocks and bonds with a single transaction, making them perfect for new investors.
The trouble is many mutual fund companies require initial minimum investments of between $500 and $5,000. If you’re a first-time investor with little money to invest, those minimums can be out of reach. But some mutual fund companies will waive the account minimums if you agree to automatic monthly investments of between $50 and $100.
Automatic investing is a common feature with mutual fund and ETF IRA accounts. It’s less common with taxable accounts, though its always worth asking if it’s available. Mutual fund companies that have been known to do this include Dreyfus, Transamerica, and T. Rowe Price.
An automatic investing arrangement is particularly convenient if you can do it through payroll savings. You can typically set up an automatic deposit situation through your payroll, in much the same way that you do with an employer-sponsored retirement plan. Just ask your human resources department how to set it up.
7. Play it safe with Treasury securities
Not many small investors begin their investment journey with US Treasury securities, but you can. You’ll never get rich with these securities, but it is an extremely safe place to park your money—and earn at least some interest—until you are ready to go into higher risk/higher return investments.
Treasury securities, also known as savings bonds, are easy to buy through the US Treasury’s bond portal Treasury Direct. There you can buy fixed-income US government securities with maturities of anywhere from 30 days to 30 years in denominations as low as $100.
You can also use Treasury Direct to buy Treasury Inflation Protected Securities, or TIPS. These not only pay interest, but they also make periodic principal adjustments to account for inflation based on changes in the consumer price index.
And as is the case with mutual funds, you can also arrange to have your Treasury Direct account funded through payroll savings.
Unfortunately, the yields on treasuries have been getting closer and closer to 0% for a while now, and there’s no end in sight to their lackluster performance. This makes treasuries mostly a place to stash cash for safekeeping rather than a way to grow your money.