You have $100 and you don’t want to put it in the bank or spend it on the latest craze. What should you do instead? Have you considered investing it? Investing can be an easy way to build your net worth and accomplish your financial goals like retiring on time or saving for a mortgage down payment. If you need help with how to invest your first $100, here are a few ideas.
#1: Invest in a Large Cap Index Fund
If you have no experience with investing, the process can feel intimidating. As a general rule of thumb, only invest in funds or stocks you understand. Don’t buy an investment just because Jim Cramer is shouting at the top of his lungs (today) to “Buy X stock.” Tomorrow, he might be telling you to sell the exact same stock before you lose everything.
Instead, look into index mutual funds. Index funds invest hold positions in hundreds or thousands of companies and try to mimic the performance of a broad market index such as the S&P 500. It’s a cheap way to own a small piece of every major company and minimizes your risk exposure.
Investing in a large cap index fund is a relatively low-risk investment because it invests in widely recognizable companies like Apple, Microsoft, Exxon Mobil, etc. These are companies that produce products you probably use on a daily basis.
Index funds are another great investment option because they have really low fund expenses that eat into your earning potential. The average expense ratio for index funds is 0.11% and 0.70% for actively managed mutual funds. For every $100 you invest in an index fund with a 0.11% expense ratio, 11 cents pays fund expenses instead of being invested.
There are several brokerages that offer index funds with minimum initial investments of $100 or less. You might consider Charles Schwab where the Schwab S&P 500 Index Fund (SWPPX) and Schwab Total Stock Market Index (SWTSX) only require a $1 investment to get started!
#2: Invest in an Index ETF
Exchange Traded Funds (ETFs) are essentially mutual funds because they hold positions in several companies but can be bought or sold anytime during trading hours like an individual stock.
ETFs are a good alternative if your brokerage only offers index mutual funds with minimum initial investments of $1,000 or higher. Plus, expenses are usually lower with ETFs than a mutual fund as well.
One downside of ETFs is that you have to buy whole shares. If one ETF share costs $55 and you only have $100 to invest, you will need to find an additional $10 to buy the second share, find a cheaper fund, or only buy one share and have $45 of cash remaining to invest later.
#3: Invest in a Target Date Mutual Fund
If you want an all-in-one fund that automatically invests in assets that match your age and risk tolerance, you might consider a target date retirement fund. If you plan to retire in or near the year 2055, you would invest in your brokerage’s 2055 Target Date Retirement Fund.
This is a good option to begin investing in your company 401k or a tax-free Roth IRA account. Target date funds gradually shift from an aggressive portfolio to a conservative portfolio as you approach the scheduled retirement date.
Target date funds due tend to have a higher expense ratio than index funds since they are actively managed by a fund manager, but, they are still a great way to start investing.
Related: What is a ROTH IRA?
#4: Invest in a Robo-Advisor Managed Portfolio
If you don’t object to the concept of a computer managing your money (although I think you would be surprised at just how common automated investing has become), a “robo-advisor” platform such as Betterment allows to invest your first $100 in a portfolio of stock and bond ETFs.
To get started, you simply answer a short questionnaire to determine your investment goals and time horizon. You can invest in a portfolio that is 100% stocks, 0% stocks, or any combination of stocks and bonds.
While “robo-advisors” are still a relatively new concept, many large brokerages have introduced their own managed portfolio products. These portfolios can be a cheaper alternative to target date funds (suggestion #3) and still handle all the day-to-day administrative tasks that can make invest a chore.
#5: Use a Micro-Investing App
Another option to invest small sums of money on a consistent basis is with a micro-investing app like Acorns. You might be familiar with micro-saving apps like Digit or Simple that withdraw a few dollars each month from your bank account after analyzing your spending habits.
Instead of placing the money into a separate savings account, Acorns places your money into a small investing account instead. This app won’t replace the need to invest in your 401k or Roth IRA, but, it’s a good way to save for small financial goals.
#6: Buy Individual Stock
Using your first $100 to invest might be your last investment option to consider. While individual company stocks have higher earning potentials than most mutual funds, they are also more volatile.
If you find the next Microsoft, Amazon, Apple and your $100 turns into $1,000 seemingly overnight, well done. For most stocks, you will experience many ups and downs. Your initial investment could drop significantly if they post bad quarterly results and you could lose it all if the company goes bankrupt.
While mutual funds and ETFs also have bad years, they can rely on the good performance of other companies held to offset a bad earnings report from another holding.
If you do decide to buy stocks, you might consider a blue chip stock that has a stable history and has regular dividend payouts. These stocks are often more costly than smaller companies or penny stocks, but you are more likely to earn a long-term profit due to less volatility.
How Will You Invest Your First $100?
There are many different ways to invest your first $100. No matter what brokerage you use or whether you invest in a stock, bond, mutual fund, or ETF, the important thing is that you invest in something.