How investing $100 a month can be life-changing — the motley fool gas jobs crna


No matter your age, however, there are a few boxes that need to be checked off before you’re officially ready to start investing $100 per month. Specifically, you need to build up an emergency fund to provide for your basic expenses for at least three months with no income, and you need to pay off all high interest — namely credit card — debt. Failure to do either will only dig a deeper hole to climb out of.

Consider credit cards. Currently, the average interest rate on an unpaid credit card balance is above 16%. That means that the $1,000 balance you have yet to pay off will total $1,160 by next year if nothing is done. Crucially, the stock market — on average — returns 10.8% per year. That means even though your $1,000 investment could grow to $1,108 by next year, your debts will have increased at a faster clip!

While it’s not mathematically the most efficient way to rid yourself of credit card debt, Dave Ramsey’s debt snowball method has proven especially effective. The idea is that you pay down your smallest credit card balance first, and work your way up to the largest one. The psychological benefits from crossing each balance off your list give you the strength to carry through.

As for the emergency savings, it’s crucial to understand how it will protect your investments. Most times, people need "emergency" money because they’ve lost their job. And most times, lots of people lose their jobs around the same time as economic contractions hit. And most times — are you noticing a theme here? — economic contractions happen at the same time the stock market tanks.

Think about it: if you have to tap your investments to pay rent or buy food, you’ll be forced to sell stocks when they are at their lows. And when those stocks recover, you will no longer be participating in their rally. If, however, you have an emergency fund, you give yourself time to find other sources of income without having to panic-sell. Where can I set up my account?

Next, we need to cover the nuts and bolts of actually setting up an investment account. Because you’ll be investing $100 per month, you want to lower your transaction costs as much as possible. You can do this two ways: either go with the lowest cost-per-trade discount brokerage out there, or wait to buy stocks once every two or three months.

I, on the other hand, use Ally Financial ( NYSE:ALLY) to buy stocks. The online firm charges $4.95 per trade. If I purchased one stock or fund every month with $100, trading costs would eat up 4.95% of my cash — a pretty hefty percentage. If, on the other hand, I only made purchases once every three months — with a total of $300 each time — the trading costs would deplete 1.65% of my funds.

Once you pick a brokerage account, you’re ready to sign up. As you go through the process of filling out the (likely virtual) paperwork, you’ll be asked what type of account you’d like to open. I highly suggest you consider making this a tax-advantaged retirement account.

The two most common retirement accounts are Traditional IRAs and Roth IRAs. Between the two of them, you are allowed to put away up to $5,500 per year ($6,500 if you are 50 or older), but that shouldn’t be a concern since right now you’re just shooting for $100 per month.

Money you put into a Traditional IRA is tax-deductible immediately, meaning the $1,200 you put in over the course of a year will lower your income taxes right now. When you pull the money out in retirement, you’ll have to pay taxes then — though most people’s tax brackets are lower in retirement than during their working years. It should be noted, as well, that there’s a 10% penalty for withdrawing money before you reach 59-and-a-half years old.

With Roth IRAs, you get no immediate tax benefit. All of the growth and all of your withdrawals in retirement, however, are completely tax free. As a bonus, you can take your principle out at any time without having to pay a penalty. If you withdraw more than that amount — if you pull out some of the growth your Roth has accumulated — you will pay a 10% penalty.

Since you are likely a beginner looking to get the broadest exposure to stocks, I think your best bet is to put your $100 per month into shares of the Vanguard S&P 500 ETF ( NYSEMKT:VOO). By owning shares, you pay a very small 0.04% expense fee per year, have exposure to the 500 largest stocks in the United States, and receive a modest 1.8% dividend yield. The stocks you’ll be investing in range from growth stocks like to slow-growing energy companies like Consolidated Edison. This range in investments will also add the safety of diversification to your portfolio: if one stock goes down by a lot, it won’t have an outsized effect on your portfolio.