My bad debt is gone… now what?
People often ask me how to get started investing once they’ve paid off their high-interest debt. My usual answer: Open an IRA, and start building a diversified portfolio of low-cost index funds.
The catch, of course, is that many index fund companies have large minimum investments. Fidelity index funds have a $10,000 minimum investment, and Vanguard index funds require $3,000 up front.
Matt’s note: Betterment offers a great way to invest and have no minimum balance requirement. Read my Betterment Review for more info.
What if you don’t have $10,000 laying around? Or even $3,000? What if you’re at a point right now where it takes serious work to save/invest $100 each month?
1. Get That Employer Match!
First things first: If your employer offers matching contributions to your 401(k), that’s absolutely Investing Priority #1. An immediate, guaranteed 100% return is not something to pass up.
On occasion, people tell me that they’re not comfortable investing in their 401(k) because they don’t want to put any money at risk in the stock market. To that, I have two replies:
- You can probably invest in your 401(k) without putting money in the stock market. I have yet to see a 401(k) plan that doesn’t offer a low-risk investment option such as a money market fund or short-term government bond fund.
- For most investors, it’s borderline impossible to reach their financial goals without allocating at least a portion of their portfolio toward stocks.
2. Schwab’s Commission-Free ETFs
Schwab recently began offering no-commission ETFs.
A little background: Exchange-Traded Funds (ETFs) are essentially index funds that can be bought and sold like regular stocks. They typically carry even lower expense ratios than index funds, but you must pay a brokerage commission when you buy or sell shares of them.
The fact that Schwab doesn’t charge a commission on their new ETFs (if you buy them in a Schwab account) makes them a great way to get started investing.
The catch is that their commission-free list doesn’t include any bond ETFs, and bonds are an essential part of a diversified portfolio. So be prepared to fork over a $12.95 commission every time you want to add to the bond portion of your portfolio.
One last point about Schwab: They require a $1,000 minimum initial investment to open an IRA unless you set up a monthly contribution of at least $100. (Automating your investing is a great idea anyway, so this shouldn’t be much of a drawback.)
Here’s the page to open an IRA at Schwab.
3. Vanguard’s STAR Fund
A third option is Vanguard’s STAR Fund, which has a minimum investment of only $1,000 as opposed to $3,000 like other Vanguard funds. The STAR Fund carries a low expense ratio of just 0.32% and a fairly conservative allocation with 62% of its portfolio in stocks and 38% in bonds.
It can be a great way to get started until you’ve accumulated enough to branch out into other Vanguard funds.
Here’s the page to open an IRA at Vanguard.
Just Get Started.
Any of the above options should work well–as should a whole host of other investment plans. The most important thing to know is that when you’re just beginning to invest, how much you invest is more important than how you invest. So get started!
About the Author: Mike Piper is the author of Investing Made Simple. He also blogs at The Oblivious Investor.