We all have more time on our hands at home, in these days of the coronavirus pandemic and social distancing. Rather than lament the absence of our usual social activities and hobbies, why not take this opportunity to learn something new?
If you have an extra $200 to play with, you can learn how to invest in the stock market and other online investment opportunities. Where you ultimately put your money will depend upon the time you want to spend monitoring and managing your investment and what your risk tolerance and interests are. This advice is from the office of a noted Philadelphia bankruptcy attorney.
The First Thing to Invest In is Yourself
Pay Off Your Credit Cards and Fund Your Emergency Savings
Ideally, you will have paid off your credit cards and have established 6-8 months of emergency savings before you think about investing any amount of money in anything else. If not, consider putting that $200 towards your credit card balance, because no investment will give you a return that not having to pay credit card interest will.
If you have no credit card debt, good for you! Start emergency savings account with that $200 and contribute to it every pay period. When an unexpected expense arises, such as the hot water heater leaking or a major car repair, you will have the funds to pay for it rather than put it on your credit card and pay that exorbitant interest.
Know that this $200 you are thinking of investing must be truly “extra” to your needs, in that you won’t need it today or in the near future should an unexpected expense arise. Expect to tie that money up for at least five years.
Invest in Your Retirement
If your employer offers a 401(k) retirement plan, you should contribute to it, especially if your employer matches your contributions. If you do not, you are leaving free money on the table.
For example, If you earn $50,000 annually and plan to invest 10% of your income toward retirement, you would start by contributing about $200 every two weeks. The $200 you have in hand is your first contribution!
If you are age 35 when you start investing 10% of income in your 401(k), you would have $800,000 by the time you’re 70, assuming you get a 2% raise each year.
But if you start contributing when you are 25 years old, with the same assumptions, you’ll have as much as $1.7 million by the time you’re 70. That’s how time affects even the smallest periodic investment.
The final perk of investing in your employer’s 401(k) is that you contribute with pre-tax income, so the income you are taxed on is less than what you actually earn, putting you in a lower tax bracket. That’s a win-win.
Consider Investing in Your Education or Small Business
If you’ve always wanted to learn something like a language, pottery, diesel engine repair, or gardening, there are low-cost online courses you can take that may lead to certification that you can then turn into another income stream.
If you already have a skill you would like to monetize, think about using that $200 to set up a website so people can find you and your product or service. Or you might invest in a membership in one of the many websites offering to match people looking for your product or service with you.
1. Use One of the Low- or No-Cost Virtual Investment Companies
There are many low or no-cost investment companies available that will allow you to invest as little as $200 initially. For example, Robinhood is an online investment platform that allows you to buy and trade stocks with no fees.
If you would prefer that the experts trade your stocks for you, consider investing in a “robo-advisor.” You can use a robo-advisor to take advantage of the low-cost virtual alternative to meeting with and paying a financial advisor.
Robo-advisors ask you a series of questions and then invest and reinvest your money automatically, based on your tolerance for risk. Betterment is one of a large class of investment advisers that provides portfolio management online without the need for much input from you once you set initial risk preferences. If you want to set it and forget it, you can.
2. Invest in Businesses that Align with Your Social Goals or Priorities Through Exchange-Traded Funds
Companies such as Stash allow you to invest as little as $5 in several different companies around a theme such as “Defending America,” “Clean and Green,” or “American Innovators.” Investing in these exchange-traded funds (ETF) gives you diversified access to stocks, bonds, and commodities.
While it is inexpensive to get started with Stash, the fees do add up. There is a $1 per month maintenance fee and a 0.25% fee for accounts with a balance of less than $5,000.
3. Invest in Peer-to-Peer Lending
Peer-to-peer lending platforms allow individuals to back other individuals or create a portfolio of individual loans based on their risk tolerance.
For example, the P2P lending platform Prosper gives investors seven risk categories to choose from, each with a different estimated rate of return and level of risk. Here’s a look at the current risk levels and estimated returns, according to Prosper:
- AA – 4.99%
- A – 5.22%
- B – 5.77%
- C – 7.78%
- D – 11.49%
- E – 13.48%
AA loans have the lowest risk of default, and therefore the lowest returns. E loans have the most risk of default, and therefore the highest returns. You will have the opportunity to spread the risk out across several or all seven risk categories to balance your portfolio.
Although many P2P platforms require a $500 or $1,000 minimum initial investment, you can get started with Prosper and others with just $25.
The most important thing about getting started investing online is to expect that money to be unavailable to you. That way, your money can grow undisturbed and you won’t feel stressed about not having access to that money if you need it. The next most important thing is that you enjoy learning about investing online, to the extent you want to be involved. Good luck!
About the Author
Veronica Baxter is a legal assistant and blogger living and working in the great city of Philadelphia. She frequently works with David Offen, Esq., a busy Philadelphia bankruptcy lawyer.
