The 7 Best Ways For Parents To Invest Little Money

After giving birth to my second daughter I went on parental leave for 2 years. We were on a tight budget. The last thing I considered was investing money. Even if I‘ve already invested money for years into a brokerage account I thought I better wait until there is a lot of money to invest again. Why should I invest only 100 per month now when I invested 1.000 and even over 2.000 per month before? It felt pointless as it was just not enough money to make a difference, right?

Actually it does and more than you may think. It‘s this habit of investing our money we need to create first and then maintain to grow our wealth consistently. You might be surprised just how easy it is to learn how to invest even little money wisely into the stock market so that it can grow into more money over time.

In this post I will show you the 7 best ways for parents to invest little money into the stock market that will surprise you. I believe the best investments come down to first learn how to invest and use the most important dynamics in the market to get big returns even if investing little money.

That‘s how this post is different from others. You will not get a random list of ideas where to invest little money like buy half of stock x,y,z or diversify your investments like this. But rather you get a list of the 7 best ways on how to invest little money so smart that you get big returns on small investments. If you want to know where to invest little money, check our blog post about The 7 Best SAFE Index Funds For Financial Independence.

That‘s why I want you to know right from the start how you can actually live from your investments one day so that you truly understand investing into the stock market. On top, I also share the special deals you can use when you start investing your money. Let‘s dive in. First, we look at a common investing fear that new investors must overcome.

What If I Loose Money In The Stock Market?

I can tell you upfront: you will „loose“ money in the market. It‘s just part of the game. But I can also tell you from our own years-long investing journey: you will „win that money back“ and even more if you invest your money smart – more on that later.

We experienced a roller coaster with our investment portfolio: we stopped investing once our portfolio reached over 80.000. It then became worth over 100.000 to then drop to less then 67.000 and up again at 110.000+ in just 2 years. That‘s because the market always goes up again. But that can take quite some time. So, what do you do?

I tell you what we have done and plan to do. You might be familiar with our family‘s goal to achieve early retirement or semi-retirement – we‘re still figuring it out and reveal our real story here. However, we are in the wealth accumulation phase right now. Our investment goals are simple: we just keep on buying at the stock exchange to grow our brokerage account. Our personal risk tolerance is quite high as we think long term having our financial goals in mind.

We learned to manage and control our emotions and never sell out of panic. You can only loose money if you sell your investments or if you invest into speculative products like certain individual stocks or specific crypto currencies. We cover those in that other blog post in detail where we also talk about The 7 Best SAFE Index Funds For Financial Independence.

However, we learned to prioritize time in the market versus trying to time the market. We simply keep on buying and think long-term. That‘s why we neither approached any financial advisor so far nor bought any financial products from investment professionals. When the market goes down we‘re happy to buy at a discount and when it‘s up we‘re happy to see our investments grow.

We found that becoming a successful investor is actually super simple if you understand how the stock market works. We therefore believe, the first step is not to work with a financial advisor as others may recommend but simply to educate yourself. You could use investment legends like Warren Buffett to do so.

That was one of the first resources I learned from, especially when it comes to general money management and the pitfalls of using a credit card. But his recommendations or those of others like him have limitations when it comes to investing for financial independence. For example: today, we use a credit card intentionally to collect miles and pay with those for our traveling. However, here are some more specific resources that helped me the most when I started investing for F.I.R.E.:

Books:

• „The simple path to wealth“ is for people interested in investing for F.I.R.E. (Financial Independence Retire Early) and insights of the investment world (US focused).
• „The psychology of money“ is for people who want to learn the 101 of personal finances based on real life examples to create better financial habits and more financial room to invest.

YouTube:

• „Our rich Journey“ for people interested in investing for F.I.R.E. even as an absolute beginner (US focused).
• „Ben Felix“ for people generally interested in investing and with a bit more knowledge or willingness to learn.

How To Live Off Of An Investment Portfolio If The Market Is Down

Learning how to actually live from your investments is the first step to learn where you should invest even little money so that it‘s best for YOU.

Let‘s fast forward to the wealth preservation phase in our retirement planning to show you how living from a stock market portfolio actually looks like. We plan to live off of our investment portfolio in the stock market one day. We decided to invest 100 % into stocks, more specific into broad-diversified stock ETFs – short for Exchange-Traded Funds – but more in that other post as mentioned where we will also talk about the differences to Index Funds and Mutual Funds. The one question we need to ask now is this: When the stock market is down, how long can we live without accessing the money we have invested and the passive income we expect to get from there?

Let‘s look at 2 things to answer that:

1. What to actually do in worst case scenarios of market downs.
2. How you can still use your investments in retirement if you „loose“ money in the market.

Let me ask you another question to understand those 2 things: Do you know how you will actually live off of your investment portfolio in (early) retirement? How you will take out money from your portfolio, aka withdraw? And what rules you need to take care of especially when it comes to your taxes and healthcare implications when withdrawing money? Or what to do when the market is down, aka using certain withdrawal strategies? I didn‘t. That was a huge mistake and lead to a wrong F.I.R.E. calculation and bad investment decisions.

I believe everyone needs that knowledge as soon as possible so that you know how to behave when the market is down before retirement and in retirement and don‘t run out of money or deplete your portfolio completely.

A little spoiler: We just have put this kind of financial knowledge and much more into a Workbook for F.I.R.E. to be published on our Blog. So stay tuned. It is a practical step-by-step guide on how a European family like us (and everyone else) can achieve financial independence and make the early retirement dream a reality – however that might look like for you. Now, you can either buy your next family sized pizza or you invest that little money now to once make your early retirement dream a reality for your family without ever running out of money in retirement.

There is one more thing I want to point out from the workbook as this is the answer for how to live off of an investment portfolio if the market is down: building up your own emergency fund. Let‘s see why and how.

Why You Should Build Up An Emergency Fund When Investing

You will experience ups and downs in the market of 30+ % or -30 % and more. So, your personal risk tolerance should be high enough to endure that and not sell out of panic. Actually, it‘s easy to keep your emotions out if you know what to do. Downs like -30 % or more can only become a problem if you need the money from your investment portfolio to pay your bills and have no safety net behind. In the F.I.R.E. community we call this safety net an emergency fund.

An emergency fund simply translates to a bank account where you save money ideally into the high-yield savings accounts you already have. High-yield savings accounts are bank accounts you get 2-4+ % returns just for having your money sitting there contrary to a regular money market account which is just a normal bank account typically offering no or only tiny returns. Now, an emergency fund should pay for your living expenses for 2 to 3 years if the market is down. That‘s because of 2 things.

First, stock market history already showed that the stock exchange can go down for 2 to 3 years in a row. That happened in 1939-1941, 1973-1974 and 2000-2002 for example. Now, if you deplete the stock part of your portfolio too much during your first 10 retirement years (because those could include such 2 to 3 years in a row with market downs) you could run out of money in retirement.

That risk is well known as the so called sequence of return risk that is explained in detail in the workbook. In other words, if your portfolio at the stock exchange is down for a longer period of time and you still take out money from it you could deplete your portfolio completely depending on how much money you take out, aka your withdrawal rate.

However, now you can take out enough money from your emergency fund when the stock market is down to pay your bills and not deplete the stock part of your portfolio too much during market downs. If the market is up again and you experience years of great returns like 30+ % you again fill up your emergency fund in retirement. But that is just a brief overview of what we go into detail in this F.I.R.E. workbook.

What is the picture you have in mind of your own financial retirement planning? What is your risk tolerance? Can you imagine to own an investment portfolio worth for example 500.000 that goes up and down by 30+ % per year? Can you manage a big emergency fund worth 2 to 3 years of living expenses to ride out market crashes or downs over years to come?

Is this something for YOU? For us the answer is absolutely yes. But we need to learn a lot and start somewhere with investing our money.

The 7 Best Ways For Parents To Invest Little Money Listed By Amount

First and foremost, the best way to invest little money is also the best way to invest a lot of money. If you learn about this one best way to invest little money, you‘ll be best placed when you starting investing more money.

I believe the best investments are not speculative ones but rather regular, consistent and long term investing. The good news is for this kind of investing you just need to learn about some dynamics in the stock market. So, here are the 7 best investment options you have on how to turn your small investments into big returns.

If You Start Investing With 0 Money

…you can take advantage of limited deals investment brokers offer just for opening up a brokerage account. For example, the brokerage firm eToro is available worldwide and is gifting you frequently 30 Euros or Dollars when you got invited to eToro by a friend. This friend also gets 30 for inviting you. Another brokerage firm like Robinhood from the US offers 1 share of free stock just for opening up a brokerage account. As it‘s free money you can use it to get into the habit of investing money without the fear of loosing real money so to say.

Furthermore, If You Start Investing With 0 Money

…you could take advantage of your company‘s investing program also known as workplace retirement plans. That is a great starting point because others are managing everything for you. All you need to do is decide for a specific amount you want to contribute once or monthly directly from your salary. If your employer doesn‘t offer that maybe you can invest through something like an individual retirement account supported by the state. All of those retirement products were invented to help closing the retirement gap for employees. If you want to run your own numbers you can take advantage of our Retirement Gap Calculator here.

If You Start Investing As Little Money As 10 Euros

…you‘ll have one huge advantage I once had too. You can learn from failures before making „expensive“ failures because it‘s „only“ 10 Euros you‘ve lost if that happens. If you bet on one individual stock and it was the wrong one you only lost a small amount of money. And even if that hurts you‘ll quickly get another chance to do it better. I will be honest with you. When I started investing into the stock market I traded stocks. Sometimes that trade was successful, sometimes not so much and other times I lost all my money. But I never gambled with more than 10 to 30 Euro. However, even 10 Euros is enough money to start learning about how to (not) invest.

If You Start Investing As Little Money As 30-50 Euros

…consider to split that money and also invest in yourself to educate yourself in that investment world that might be mostly new to you. If you consider investing a small amount of money like 50 it shows you‘re already in the right mindset. The best thing you can do now is to invest a part of it into something helping you to form good money habits. Because that will boost your investing journey like nothing else. Promised. Unfortunately, that‘s the last thing people do. Frankly, that was the case for me. It took me years until I invested as little money as 27 Euros into a persons‘ financial product and expertise (it was a F.I.R.E. workbook). But it paid off immediately as I had so many AHA-moments that I almost regret that it took me so long to spend as little money as 27 Euro for myself. So, simply invest in yourself and buy that financial tool you need most for where you‘re at right now in your life.

If You Start Making Small Investments Like 50-100

…learn to use the power of compound interest to your advantage. When you start investing your first 50-100 Euro learning about the power of compound interest can be incredibly worthwhile. It will show you what‘s possible for your money if you commit to invest it consistently. Of course, that‘s also true for small amounts of money you invest. But if investing 50-100, especially if you do it regularly like each month, you can create quiet a nice nest egg for your retirement.

So, no matter if those 50-100 is extra money you save or earn on top, the question is how much money can you make out of 50-100 if you invest it each month? For investing 50 the answer is over 103.000 after 30 years of investing at a 10 % return on average. For investing 100 the answer is over 206.000 with the same parameters. The dynamic behind is called compound interest.

We offer a Compound Interest Calculator for free (!) here so that you can see what‘s possible for your money if you invest a part of it one time and then let it grow. If you want to see how it would look like if you consistently invest a specific amount of money each month into the market, you can take advantage of the free Investment Growth Calculator here.

To understand compound interest let‘s look at one simple example: If you put 1 dime into the market and you now have 2 dimes you earned 1 (= your interest). If you reinvest this 1 dime you earned you then can earn additional interest on this initial interest of 1 dime (= compound interest). Or in other words, your money constantly grows if you reinvest your money and simply let it sit in the market over decades.

That leads us to the easiest and least time consuming investment strategy: Dollar-Cost Average.

If You Start Investing As Much Money As 100-300

…consider the investment strategy Dollar-Cost Average.

The “Dollar-Cost Average” investment strategy sounds like a fancy term. But it simply means that you invest the money you have into the stock market and keep on adding with a fix amount like 100-300 at a regular interval like each month at your brokerage firm of choice. If the market drops you’re happy about buying at a discount. If it swings up you enjoy it. That‘s what we do and we couldn‘t be happier. Honestly.

Also, if you invest 200-300 take advantage of special offers of some brokers. For example, eToro frequently offers you 10 Euros or Dollars when you deposit 100. And even if that is a small amount of money, it‘s free money. Another brokerage firm like Trade Republic from Germany offers 1 fractional share of free stock for up to 200 Euro after opening up a brokerage account and investing 300. That is a great return on investment after just starting to invest your money.

If You Start Investing As Much Money As 300-500

…learn to apply the rule of 72 to double your money.

The rule of 72 shows how fast you can make 2 dimes out of 1. The formula is easy. Divide 72 by the fixed average rate of return you expect to get and you’ll know how many years it will take for your money to double.

But what is an average rate of return? An average rate of return is all of the profits and losses of an investment over a specified period of time calculated as a percentage of the initial investment. For example, let‘s say you invest 500 Euro each month over the course of 2 years which is in total 12.000. You experience 1 year with +20% return and 1 year with -10% return. In this simplified example the return on average would be +10% after 2 years from making your initial investment.

Now, we divide 72 by 10 (%) which is 7.2 meaning your 12.000 will need 7.2 years to double and become 24.000 if you expect to continuously get those 10 % return on average.

If we continue doing this calculation those 24.000 will need another 7.2 years to double again so that after 14.4 years you‘ll have 48.000 and so on. After almost 29 years you‘ll have a stock market portfolio worth 192.000. We remember, the initial investment from our bank account was just 12.000! This is how you can turn even a seemingly small amount of money into a big one without any effort on your side.

By the way, if you have a stock market portfolio of 192.000 Euro you can take out over 640 Euro each month from it without ever running out of money over 30 years. In the F.I.R.E. community we call this a withdrawal of 640 which represents a so called withdrawal rate of 4 %. That means you only take out 4 % of your total portfolio in retirement. If you want to know more about how you too can live off of your stock investment portfolio head over to „A Unique Guide How To Retire Early With Kids The Fastest Way“.

All of those 7 best ways to invest little money into the stock market come down to the simplest and most effective investing strategy for new investors like us: regular, consistent investing over a long period of time into smart investments, not speculative ones. Which one exactly will be revealed in the next post about the 7 Best SAFE Index Funds For Financial Independence.

When you walk away today with at least one new idea to improve your personal financial journey towards F.I.R.E. I’d love to show you some more in the next post. If you haven’t already, you can apply to become a part of the community to not miss any new release. For that you can subscribe to our newsletter below in the green footer.

Now, I’d love to hear from you: Have you ever felt like you can’t afford to invest and what waked you up to consider finally start investing – even with little money? Let me know in the comments below!

Title image source: Ibrahim Rifath on Unsplash