How to Start Investing When You Don’t Have Any Money

how to start investingI remember when I was a child and I first started to learn about investing. I was probably in middle school and we had a stock picking contest. Back then, you would find the closing price of a stock in the newspaper from the day before.

No stock charts.

No research.

Just a price and the volume of the stock that was traded that day.

I remember that I picked Coca-Cola as my stock (KO). While I’m sure Coke has done fantastic since the 80’s, (it’s returned about 10% per year on average), I can’t remember that I won that contest back in grade school.

But this was enough to get me interested in investing.

At some point in high school, I was given the Wall Street Journal’s Guide to Money and Investing (affiliate link). With this book, I was hooked.

I became fascinated with the way money and the stock market worked. I started to learn about stocks, bonds, mutual funds, and terms such as present value, future value and internal rate of return.

In a nutshell, I was hooked.

I started investing in my first mutual fund towards the end of high school or beginning of college. It was the American Century Ultra Fund. Although the fund had a minimum investment of $2,000 or so (which I didn’t have), I could start investing with $25 per month, so I did.

Sometime after college, I took the money from that fund and invested in a tech startup. The stock doubled or tripled in value within a week or two. Unfortunately for me, I was working for an investment firm at the time and we were not allowed to sell any stocks that we had purchased within 30 days.

So I had to sit and watch that stock fall right back to the price I purchased it at, and then it went to basically zero…

Bummer.

But anyway, that is how I got started investing. In this article, I want to share with you how you can get started investing in the stock market.

Investing 101

Let’s start with the basics. What is investing?

Investing is a tool for wealth building. If it didn’t lead to wealth, then people would simply stash all their cash in their mattress or in a checking account. Both of these are “safe” places to put your money, but neither of them allows your money to work for you.

And that’s what investing will do – it is a way to let your money work for you through the power of compound interest.

Here are a couple of quick examples of what compound interest is, and how it can make your money work for you.

But first, let’s define compound interest. Compound interest is the addition of interest or dividends to the original principal amount of your investment to be reinvested into that investment. By doing this, the next time interest is paid on the investment, it is paid on the total amount of principal plus the reinvested interest – leading to higher and higher subsequent interest payments.

Let’s say you start with $10. After the first year, you receive 5% interest or .50 cents. Now you have an investment of $10.50. At the end of the second year you receive an additional 5%, but this time you receive .53 cents, not the original .50 cents. During the third period, you receive 5% on $11.03, or .55 cents.

Can you see the power of compounding interest?

I own Apple stock. A couple of months ago I took a look at my IRA and noticed that the dividends from Apple were just accumulating in a money market fund. I was furious because I had thought that they were being reinvested. Can you understand why?

Using Apple as an example, let’s look at how powerful compounding can be.

Apple Stock and Compounding

Apple started paying a dividend in 2012. Let’s say that you started with a $10,000 investment in Apple back in 2012. What would that investment be worth today (June 28, 2017)?

If you invested $10,000 into Apple stock at the beginning of 2012, you would have received 153.35 shares (accounting for a stock split that occurred in 2014). Those shares would be worth $22,362 today (Apple closed at $145.83 per share yesterday), an annual growth rate of 15.7%. And you would have received a small dividend each quarter as well.

Honestly, that’s a pretty good return on your investment, right?

However, let’s say that you reinvested those dividends back into Apple stock. Your $10,000 investment would have grown to $24,759, or an annual growth rate of 17.92%! You would have almost $2,400 more in your account, just because you reinvested those dividends.

Are you starting to see the power of compound interest? And are you seeing why I was so upset to see that my dividends weren’t being reinvested?

Back to Coca-Cola…

Remember that stock that I picked back in grade school because I liked to drink soda? Let’s see how I would have done if my parents would have fronted me $10,000 and I put it all in Coca-Cola (KO).

That $10,000 invested on June 29, 1987, would be worth $163,869 today, a 9.8% annualized rate of return. Again, not bad, right?

But what if I reinvested the dividends?

That same $10,000 would have ballooned to $293,022 over that same time period – an 11.9% annualized rate of return.

Pretty cool.

What is amazing to me then and still is to this day is how a seemingly insignificant and minor difference in the annualized rate of return can lead to a significant difference in asset values – to the tune of approximately $130,000 over 30 years off a relatively small investment.

I remember when I was a child and I first started to learn about investing. I was probably in middle school and we had a stock picking contest. Back then, you would find the closing price of a stock in the newspaper from the day before.

No stock charts.

No research.

Just a price and the volume of the stock that was traded that day.

I remember that I picked Coca-Cola as my stock (KO). While I’m sure Coke has done fantastic since the 80’s, (it’s returned about 10% per year on average), I can’t remember that I won that contest back in grade school.

But this was enough to get me interested in investing.

At some point in high school, I was given the Wall Street Journal’s Guide to Money and Investing. With this book, I was hooked.

I became fascinated with the way money and the stock market worked. I started to learn about stocks, bonds, mutual funds, and terms such as present value, future value and internal rate of return.

In a nutshell, I was hooked.

I started investing in my first mutual fund towards the end of high school or beginning of college. It was the American Century Ultra Fund. Although the fund had a minimum investment of $2,000 or so (which I didn’t have), I could start investing with $25 per month, so I did.

Sometime after college, I took the money from that fund and invested in a tech startup. The stock doubled or tripled in value within a week or two. Unfortunately for me, I was working for an investment firm at the time and we were not allowed to sell any stocks that we had purchased within 30 days.

So I had to sit and watch that stock fall right back to the price I purchased it at, and then it went to basically zero…

Bummer.

But anyway, that is how I got started investing. In this article, I want to share with you how you can get started investing in the stock market.

How to Start Investing With Just a Little Money

If you have never invested before, or you don’t have a whole lot of money to invest, then you may be wondering what is the best way to get started investing.

The best way to start investing is to automate it. In other words, make it super simple so that you don’t even need to think about it.

Option #1 – Contribute to your 401(k)

The most obvious and easiest way to do this is by contributing to your 401(k). You tell your employer to take out a small portion of your salary to contribute to your retirement account. To make the hit easier on you, start with a smaller percentage, like 1%.

The first thing you will notice when you contribute to your retirement plan is that the amount withheld for taxes will go down. So if you make $4,000 a month, and you normally pay $600 in taxes, by contributing 1% (or $40), you will notice that your taxes will drop a small amount. This is because now, instead of receiving $4,000 in wages, you are receiving $3,960 in wages. You won’t get taxed on the full amount, you will get taxed on the amount remaining after you contribute to your retirement account.

Pretty cool, huh? This is why I love this money stuff.

After the first month, if you can stomach contributing 1%, bump that contribution up to 2% in the second month and so on until you reach the level that your employer will match (typically 3-6%).

Option #2 – Round Up Your Purchases

A second option to making investing super easy is to automatically round up your debit card purchases to the nearest dollar and invest the difference.

I love this idea and think it is a great way for people who have never invested before to get started.

There are two programs that you can look into to do this for you. The first program is Bank of America’s “keep the change” program. With this nifty program, every purchase you make is rounded up to the next dollar and transferred into your savings account. Once or twice a month, I would recommend taking the amount accumulated in that account transferring it to another investment account (Fidelity, Vanguard, TD Ameritrade, etc.) so that you will never touch the money. Obviously, you must have an account with Bank of America to participate.

The second program I recommend is the Acorns App. This is an app that will connect with your bank do essentially the same thing as the BOA Keep the Change program. The only difference is that Acorns automatically invests the money in your account into a basket of ETF’s (more on those later if you don’t know what they are) depending on your risk tolerance.

Here is a video from the company that explains the service a bit more.

The service costs $1 a month. If you have an account over $5,000, the fees are 0.25%, which is quite reasonable when compared to a full-service broker.

Also, if you are a college student with a valid .edu email address, the service is free for the first 4 years after you register. So for anyone in college who wants to start investing, this is a no-brainer.

Click here to learn more about Acorns or to sign up. If you use my link, you will receive an extra $5 in your account when you open your account. (As will I).

Option #3 – Set Up Automatic Withdrawals From You Checking Account or Paycheck

Now we are starting to get a bit more advanced. Once you have properly funded your 401(k) up to the amount that your company will match, then I recommend that you start contributing to a Roth IRA.

A Roth IRA is funded with after-tax dollars, which means that you won’t reduce your tax bill by contributing to this account. However, when you retire, you will be able to withdraw this money tax-free, and all of the earnings and capital gains on this account will grow tax-free as well.

As you can see, this is a pretty powerful account and is recommended by many financial advisors because of the long-term tax benefits.

To start contributing to your Roth IRA, you have two choices. First, (and this is what I recommend), you could instruct your employer to take a portion of your paycheck and deposit it directly into your Roth IRA. This way you never see the money and you never have to worry that it won’t make it to your account. Once again, start small and add more as your budget will allow.

The second option is to set up an automatic withdrawal from your checking account. This accomplishes the same thing as your payroll deduction but adds one more thing for you to worry about coming out of your checking account.

In the age of the internet, both of these contributions are fairly straightforward to set up.

Just Do It… Get Started Investing!

So there you have it, a little background on how I got started investing, as well as some resources and tips that you can use to start you on your journey to financial freedom.

Is there something I missed here? Have a comment to add? Do you agree/disagree with my advice? Please leave a comment below and let us know.

  • Good tips! You covered all of this but the way I’ve summed it up in the past is to simply divert some of your income (ideally automatically) towards investments. It’s the easiest way to get started and as long as you are earning income your investments will build over time.

    • Totally agree. Automation makes everything easier and insures that you can stick to the plan. My biggest issue is that I’m self-employed and my income goes up and down. It’s harder for me to automate, but I’m the exception, not the norm.