April 2017
Barbara O’Neill, Ph.D., CFP®
Extension Specialist in Financial Resource Management
Rutgers Cooperative Extension
It is possible to invest “on a shoestring” with small dollar amounts ($1,000 or less). Some investments can even be purchased in increments of $25 or $50 or less (e.g., $10 per paycheck invested in an employer retirement savings plan). Setting aside small amounts of money regularly and reducing household expenses to find money to invest are the keys to successful shoestring investing.
The best place to start investing on a shoestring is with a tax-deferred employer plan (e.g., 401(k), 403(b), 457, Thrift Savings Plan) because contributions are deductible on federal income tax returns. For example, a worker with a $35,000 salary who makes a $3,000 contribution only pays federal income tax on $32,000. If you are self-employed, you can save tax-deferred in a SEP-IRA or Keogh plan.
Employer plans provide tax-deferred growth of principal and investment earnings and the amount invested is deducted directly from a worker's paycheck, before it can be spent. Some employers also match all or part of their workers' savings. The minimum amount invested in employer retirement savings plans can be as low as $10 or 1% of pay per paycheck. The maximum contribution is set by tax law and is indexed for inflation.
Once you've saved part of your paycheck or net business income, there are other shoestring investments available. Below is a list of places to save or invest $1,000 or less:
Savings Accounts: Before you can invest money, you have to save it. Typically, $50 to $100 is required to open a basic savings account and many credit unions only require $25 to open a share account.
Certificates of Deposit (CDs): Minimum CD deposits are often $250 to $500. CDs pay a fixed rate of interest for a fixed period of time with penalties (foregone interest) for redemption prior to maturity.
U.S. Savings Bonds: Series EE and I savings bonds are debt obligations of the federal government and can be purchased at the Treasury Direct website: http://www.treasurydirect.gov. The minimum amount required to make a purchase is $25 for a $25 EE bond ($10,000 maximum purchase per calendar year). For I bonds, the minimum purchase is $25 via Treasury Direct and $50 when purchasing paper bonds with an IRS tax refund.
U.S. Treasury Securities: Like U.S. savings bonds, the place to make a purchase is the Treasury Direct website: http://www.treasurydirect.gov. The minimum amount required to buy Treasury bills, notes, and bonds and Treasury Inflation-Protected Securities (TIPS) is $100 with investment increments in multiples of $100.
Individual Retirement Accounts (IRAs): Minimum deposit amounts will vary depending upon where IRA funds are placed (e.g., a CD versus a mutual fund). Maximum deposit amounts are set by tax law and indexed for inflation. The maximum does not have to be deposited all at once, however, and can be invested gradually.
Low-Cost Stocks: Many publicly traded companies allow investors to buy stock directly through dividend reinvestment or direct stock purchase plans, Minimum subsequent investments may be only $50 or $100 once an initial stock purchase is made. For a list of companies that sell stock directly to investors, see https://www-us.computershare.com/investor/3x/plans/planslist.asp?bhjs=1&fla=0&stype=dspp.
Mutual Funds: Mutual fund shares provide ownership in stocks (growth funds), bonds (income funds), or other securities (e.g., short-term debts in money market mutual funds) that comprise a fund portfolio. Many funds accept initial deposits of $1,000 or less to open an account and subsequent deposits are usually lower (e.g., $100). Funds that require more than $1,000 to open an account often take less for automatic investment plans, individual retirement accounts, and/or custodial accounts for minors.