With the recent rise of Robo-Advisors who tout the ability to start investing with very small amounts of money, it’s an attractive prospect. Someone may only have $50 a month to set aside, but they can still get involved in the stock market! Great idea right? Often, (maybe usually) the answer is no.
The good thing about stocks is that over long periods of time, they are the best performing assets. The bad news is that it’s “over long periods of time”. Too often the person who has $50 a month to invest will need that money all too soon, to fix the radiator, to pay for the trip to Cancun, to buy the new iPhone 17, etc, etc. And what if the market has declined in the meantime? Now that person is left with all sorts of bad choices. Don’t fix the radiator, take out a loan, and the most likely outcome, take a major loss on their investments.
For someone with small amounts of money to invest each month, there are two better things to do. First, build up a cash reserve of several thousand dollars. Second, investing in retirement accounts either through a 401k plan at work, or in an IRA account of their own. That money is tax deductible (so additional savings), and will be much less of a temptation to drawn on for the leaky radiator. Once someone has done that, then investing $50 a month makes sense, because they have cash to pay for everyday expenses and emergencies.