With the rising inflation and unstable economy, more and more people realize the importance of investing their money. However, not everyone has large amounts of disposable income to invest. Is there still a way for ordinary people to start investing with limited budget? Yes, investing spare pocket change can be a good strategy to get started. By automating the investment of your spare change round-ups or your limited budget into low-cost index funds regularly, you can build your wealth slowly over time through the power of compounding. This article will illustrate this pocket change investment strategy with a detailed example.
Set up automatic transfer of spare change to investment account
The first step is to set up an automatic transfer of your spare change to an investment account, such as a robo-advisor account or a brokerage account. For example, you can link your debit card to an app like Acorns, which will automatically invest the round-ups from your transactions into an ETF portfolio. If you spend $3.50 on coffee, 50 cents will be invested automatically. Or you can set up recurring automatic transfers from your checking account to your investment account, investing your spare change budget of say $10, $20 or $50 each month.
Invest pocket change into low-cost diversified ETFs
The next step is to invest the pocket change into low-cost, diversified ETFs or index funds that give you broad market exposure. For example, you could build a simple three fund portfolio with: 1) Total U.S. stock market ETF 2) Total international stock market ETF 3) Total U.S. bond market ETF. Contributing even $10 or $20 each month into this diversified portfolio will allow you to steadily build wealth over decades. The power of compounding will grow your money overtime.
Increase contribution amount gradually when possible
As your financial situation improves over time, you can increase the contribution amount gradually. For example, you could start by investing $10 a month in your early 20s, then slowly increase it to $20, $50, $100 each month over the years. The key is to start early, stay consistent, and increase your investments periodically.
A detailed example
Here is a detailed example: John starts investing $10 a month at age 20 into a total U.S. stock market index fund, earning a 7% average annual return. He increases his contributions by $10 each year. By age 65 he would have over $100k accumulated, even though he only invested a total of $9k over 45 years. This shows the incredible power of starting early and compound growth.
Investing pocket change by automating transfers into low-cost index funds is an easy way to start investing with a small amount of money. By developing the habit early and letting compound returns work over decades, your pocket change can grow significantly.