Six Ways to Invest $50 a Month
By Floyd Saunders, Author of Five Paths to Wealth and the founder of Really Simple Investing
Sometimes is seems so easy to spend $50. That’s maybe some new clothes, dinner out or what you spend for snacks in the course of a month. After all $50 a month is never going to make much of a difference, or will it?
Saving $50 each month probably doesn’t sound like much. But it can add up quickly if you pick the right savings or investment product to do your savings/investing in.
The first basic principle of financial wealth building you much learn is to pay yourself first and that could be $50 a month set aside in a savings or investment product. With the newer mobile phone apps like Acorns, Stash or WiseBanyan you can make investing really simple.
The second principle is to start making your money work harder than you do. That’s means making every savings or invest dollar to earn the most you can, without taking unwanted risks. Learn to use the power of compound interest to grow your money.
If you do the simple math, $50 a month is only $600 a year, or 17 years before you would have saved $10,000. Not very appealing, what you’re not taking into account, however, is the power of compound growth. Learn how compound interest with this handy calculator.
Six Ways to Invest $50 a Month
You can pick from any one or more of these six ways to invest $50 a month. The main thing is to keep at, keep going going. invest every month and you will soon see your balances growing. There are three basic ways to earn money when saving or investing your money.
First you can earn interest. Take your money down to the bank and open a simple savings account. You will earn less that one percent on your money and that will never be enough.
Second, you can buy shares of great American companies and earn dividends (typically paid quarterly).
Third earn capital gains. In addition to the payment of dividends, the value of your shares of stock might go up and you will benefit from the capital gains. Let’s look at each type of account you can open with as little as $50 (sometimes less).
To show you what this could look like, take a look at numbers on the compound growth potential of investing $50 each month in a:
Money market account
Certificate of deposit
Dividend Growth Stock
Robo-Advisor account invested in index funds
Basic Savings Account
This is a deposit account that provides for the payment of interest on the money you turnover to the bank. A savings account is good for short-term savings goals or to have an emergency reserve fund. If you deposit $50 a month and earn .06% interest in five years you will have $3,004, after ten years your monthly deposits would grow to $6,017. Those interest payments are taxable of course and if you factor in the decreased spending power from inflation this is not the best choice for growing your financial security.
A savings or money market account [is typically used for] safety and liquidity—traditionally for things like an emergency fund or saving for a short-term purchase.
If you’re looking to invest now, you may want to pay particular attention to websites that update bank interest rate information on a daily basis. Even a few percentage points can make a difference. For example, a $5,000 investment that earns 0.8% compound interest over 5 years can turn into $5,200. This same investment at a 2% compound interest rate will turn into about $5,500. For the extra $300, it’s probably worth the 30 minutes it may take to find the better rate.
To compare the best rates for savings accounts use the tools at Bankrate,com
Money Market Account
The second savings account you might want to consider is a money market account. This account combines features of a checking and savings account, because you can write checks against available funds and earn interest on your deposited funds. A money market account might pay a slightly higher rate of interest, typically around .08% so at the end of five years, you money would grow to $3,006 and after 10 years $6,024. Again not a great return on your money. Find the best rates forMoney Mareket accounts at Bankrate,com
Certificates of Deposit (CDs)
These are secure investment vehicles that offer a fixed interest rate until a specific maturity date. The advantage of this investment tool over a high-interest savings account is it offers a guaranteed interest rate that will remain unchanged for the term of your investment. The catch is your money is not liquid. You must keep it locked up for the specified time period. Early withdrawal often results in a penalty. The interest gain is generally taxable.
There are different types of CDs. Each have their own terms, advantages and disadvantages. Currently, CD and interest rates are about on par with high-interest savings account rates. As such, for the average investor, it is currently likely no more advantageous than a more liquid high-interest savings account. Or continue to look for higher returns. Right now a one year CD has a 1.04% to 1.24% interest rate and a five-year CD ranges from 1.73% to 1.85%.
Dividend Growth Stocks
Stocks that pay dividends can be a great way to bring in extra income. Investing is stocks that have a long history of paying out increasing dividends every year, insures you have invested in a companies with a great return, in the form of dividend payments. Many excellent companies offer a plan where you buy an initial share of stock and then set-up an automatic transfer to buy more shares (or fractional shares) using their dividend reinvestment plan (or DRiP). Many of the plans can be started for as little as $50 a month.
To realize the power of investing dividend growth stocks check out the story of Grace Groner:
After graduating from Lake Forest College in 1931, Grace was hired as a secretary at Abbott Laboratories, where she worked for more than four decades.
Grace never earned an amazing salary as a secretary. According to the Los Angeles Times, she got her clothes from garage sales. She lived in a one-bedroom house that was willed to her when a friend passed.
But in 1935, a few years after she started her job at Abbott Labs, she bought three shares of the company’s stock for about $60 per share. Her total investment was under $200.
Grace never sold those shares. Through dividends, share splits, and dividend reinvestment, when she died in 2010, her three-share purchase was worth $7 million. She left it all to her alma mater.
The two most important lessons from this story?
A) She started with $200.
B) She took advantage of the power of compounding — for 75 years!
At one time, if you wanted to start investing in stocks, you needed to open an account with a stockbroker, and pay for each and every share of stock you bought and/or sold. This worked out well for the stockbroker, because he or she made money with each transaction and might even charge a management fee on top of the trading commissions. You would typically need at least a few thousand dollars to get start and even then be able to invest in only a few stocks, bonds or mutual funds.
All of that has changed with the newer robo-advisor services offered via mobile phone apps from the likes of Acorns, Stash, Wise Banyan and others. With many of these accounts you can start with as little as $5, but let’s stick to the idea of investing $50 a month. What you get is an account that automatically invested for you in a diverse set of Index funds, such as the S&P 500, bonds, and international stocks.
Rather than owning full shares in these funds, you own fractional shares with each $50 monthly investment. Assuming for a minute these index funds match the returns of the financial markets over time, you might average a 7% return and if that happens after five years your $50/month will grow to $3,580 and after 10 years, the account would be worth $8,654.
Employer’s 401K with 50% match
Most employer offer a retirement plan, with the most popular being s 401K plan, In many cases the employer will match your contribution up to 50% of what you contribute. (Contribute 4% of your month paycheck and the employer would match 2%). That matching contribution and your contribution is all with before tax money, so you don’t have a tax bill until you withdrawal the month, typically at retirement.). So keeping with your example, if that was just $50 a month with 50% match after five years, $5,369 and after 10 years $12, 980.
If you don’t have access to a company match, it’s still worth it to consider participating in a company 401(k) plan, because the pretax contributions come directly out of your paycheck—making saving a no-brainer.
As you can see, the larger and further away your savings goal is, the more you may want to consider putting that monthly $50 into an investment vehicle—a strategy known as dollar-cost averaging—rather than save it in an interest-bearing account.
Dollar-cost averaging is when you put money into an investment on a predetermined schedule, typically once a week or once a month. The idea is to take advantage of the up-and-down movement in the stock market. So when share prices are higher, you buy fewer shares—and conversely, when the prices are lower, you buy more shares with same dollar amount].
This strategy can be particularly helpful if you have decades to go before you reach your retirement goal, because it enables you to stay the course through market cycles to keep building your nest egg—hopefully with the added help of an employer-sponsored 401(k) match.
Automating savings is the key for most people, because they may not have the discipline to put that $50 a month away.