Do you desire financial independence, but find that it always seems to elude you? That’s often the outcome when people expect financial independence to come about as a result of some mythical magic formula, or even by dumb luck. In reality, it starts with small investments. $100, $500 and $1,000 is usually all you need to get started. And that’s really the critical first step – getting started.
In this guide, we’re going to discuss the most basic cornerstone of financial independence, which are basic savings accounts. Until you get one started, and make saving money a habit in your life, financial independence will continue to be little more than a dream.
It doesn’t have to be that way, and here’s how you can make it a reality.
Why You Need to Begin Saving – Even with Small Amounts
Here’s a shocking statistic: 78% of Americans live paycheck-to-paycheck. They have little or no savings. That’s one group no one should want to be a part of, but the majority are.
It doesn’t have to be, and you have the ability to make it otherwise in your own life.
Two of the unfortunate realities why people don’t save money are:
- They never got into the habit, and/or
- They think saving small amounts isn’t worth it.
Neither is a legitimate reason not to save money. Some of the richest people in the world came from humble beginnings and started out with very small amounts of money. What separates them from the masses is that they chose to get started. You can do the same.
You don’t need anything fancy – you can start with basic savings accounts. What is a savings account? It’s basically an account where you gradually accumulate funds for future use.
That’s important, and the most basic reason to have savings. The problem with living paycheck-to-paycheck is emergencies. Absent any savings, you’ll be forced to borrow money to cover the emergency. And it’s never just a single emergency, since life tends to throw a series of emergencies at us.
The Benefits of Getting the Savings Habit Going in Your Life
The most basic of all savings strategies is to begin saving at least a little at a time. There are several reasons why you need to begin saving:
- Being prepared for emergencies, as just discussed.
- Building a cushion into your finances, so you’re not totally reliant on your paycheck.
- Creating a financial cushion, to lower your stress levels over money.
- To create the kind of lifestyle and investment options the average person doesn’t have.
Let’s camp out on that last point for a moment or two. Financial security is created by building a large investment portfolio. But that’s not possible until you begin accumulating funds. That starts with basic savings accounts, which you build until you can move into investing for higher returns.
The bigger your portfolio becomes, the more comfortable your life will be, and the more options you’ll have. It all starts with humble traditional savings accounts. Get that going, and everything else we’ve discussed here becomes possible.
Types of Savings Accounts
You may be surprised to learn that there are multiple types of savings accounts available, even with $100, $500, or $1,000. Below are for savings vehicles, including an alternative to savings accounts. This list will give you a high altitude view of the options available to you, even with a limited amount of funds.
Each should serve as an incentive to at least get started, but also to continue growing your savings through a variety of account types.
Traditional Savings Accounts at a Local Bank or Credit Union
When it comes to savings, you don’t need to get fancy. Basic savings accounts will get the job done. While return on investment is always important with savings, just accumulating funds is even more important when you’re just starting out. As you begin to build the amount of savings you have, you can start looking for ways to increase your earnings.
In the meantime, traditional savings accounts will get the job done. These are generally available at a local bank or credit union. Just be aware most are only paying microscopic interest rates, despite the recent increase in rates. But there are some exceptions to the rule, even when you only have a few hundred dollars.
For example, DCU Credit Union currently pays over 6% on the first $1,000 you have in a savings account. The credit union is based in Massachusetts, but it’s available to depositors nationwide.
Another option is banks offering certificates of deposit (CDs). These are time deposits that require you to tie up your money for a certain amount of time, generally between 30 days and 10 years. But you can select any term in between. What’s more, they usually pay higher rates of interest than traditional savings accounts. And some banks will allow you to invest in CDs with just a few hundred dollars.
TD Bank is offering CDs with a minimum investment of as little as $250. The CDs pay higher rates than savings accounts and money markets, though you have to have an additional checking or loan account to get the highest rates.
High Yield Online Savings
Virtually every product and service you can think of is going online, in that includes banking. There are now a host of online banks, most of which pay interest rates much higher than traditional brick-and-mortar banks. In fact, it’s the absence of local branches, and the employees that staff them, that enable online banks to pay higher returns. You can often invest in these banks and earn high yields with very little money.
One of the most popular online banks is Ally Bank. It’s currently paying 2.20% APY on all its Online Savings Account balances.
Another is CIT Bank, which is currently paying 2.45% APY on its Savings Builder Account. The rate applies on balances of $25,000 or greater, but also if you open an account and fund it with monthly deposits of $100 (that’s the “savings builder” part of the account). That type of account provides a real incentive to become a regular saver.
Here’s where we move into alternatives to savings accounts. Robo-advisors are online automated investment platforms. You complete a brief questionnaire that determines your investment goals, time horizon, and risk tolerance. The robo-advisor will then design a fully balanced portfolio based on your answers.
Once created, the portfolio will be fully managed going forward. That will include periodic rebalancing to maintain target asset allocations, as well as reinvesting dividends. Many even offer strategies to minimize the tax liability from capital gains.
Some robo-advisors allow you to begin investing with little or no money. For example, you can open an account with Betterment with no money, then set up monthly recurring contributions. They’ll create a fully balanced portfolio of stocks and bonds, and manage it for an annual fee of just 0.25%. That’s just $2.50 on $1,000.
Wealthfront requires a minimum initial investment of $500, and also has an annual management fee of 0.25%. It provides a more diversified portfolio than Betterment, by also adding real estate and natural resources to the basic portfolio of stocks and bonds.
You can use robo-advisors either as primary savings vehicles, or in conjunction with other savings plans, like a traditional or online bank account.
Employer Savings Plans
Many employers offer either a 401(k), 403(b), 457 plan or Thrift Savings Plan (TSP). With each plan, you can contribute up to $19,000 per year, plus many employers also offer a matching contribution.
But don’t be intimidated by the high maximum contributions. You can begin contributing any amount you like. It can be a flat amount, like $100 per month, or a percentage, like 2% of your pay. Best of all, since the contributions are tax deductible, it’ll be like the government is providing part of your contributions.
If your employer doesn’t offer any savings plans you can set up your own with either a traditional or Roth IRA. You can contribute up to $6,000 per year, and invest the money any way you like. You can even invest through a robo-advisor, most of which specialize in IRA accounts.
Contributions to a traditional IRA are generally tax deductible, but Roth IRA contributions aren’t. But because they’re not tax deductible, Roth IRA contributions can be withdrawn at any time, without a tax liability or early withdrawal penalty. That could make the Roth IRA the better choice if you expect you may need access to the funds before you retire.
If you’re not contributing to some sort of retirement plan now, get started as soon as possible. They offer a combination of tax-deductible contributions, employer matching contributions (on employer plans), and tax deferral of investment income. The combination holds the potential to provide much more generous returns than you can earn with basic savings accounts.
How to Choose the Best Savings Vehicles for You
The solution will be a little bit different for everyone, but once again let’s emphasize that you absolutely need to get started. Don’t let a small amount of money stand in the way of your becoming a saver.
If you only have about $100 or so, start with traditional savings accounts. You can usually open one with just a few dollars. If you want higher returns, you should consider an online bank with high yields on basic savings accounts.
With just a few hundred dollars, you can also begin investing in robo-advisors. In theory at least, you could even do that with little or no money at all. But since investing in stocks carries risk, you won’t want to have 100% of your money in a robo-advisor. But with just a few hundred dollars, maybe only $500, you can split your money evenly between one or more types of savings accounts and a robo-advisor. You can even set the robo-advisor up as an IRA.
And While You’re at it, Don’t Forget to Add a Retirement Plan to Your Savings Mix
If you do have the availability of an employer-sponsored retirement plan, like a 401(k) plan, you should absolutely participate in it. Even if you’re only saving 1% or 2%, it’s a start. Over time, and as your income increases, you can gradually increase your contributions.
For example, let’s say you start with a 2% contribution. After one year, increase that to 3%. After two years, increase it to 4%. Your salary increases should more than offset the higher contributions.
If possible, you should work toward at least making the minimum contribution that will produce the maximum employer matching contribution.
For example, let’s say your employer will match 50% of your contribution, up to 3% of your salary. You should work up to a 6% contribution, which would produce the maximum match of 3%. That will give you 9% going into your plan each year. And since one-third of it will come from your employer, and at least some of your own contribution will be tax-deductible, it’s possible that less than half the 9% contribution will actually come out of your own funds.
If you can steadily contribute to a retirement plan, in addition to contributing to other savings vehicles, you’ll be well on your way to financial independence.
Final Thoughts on Small Investment Ideas for $100, $500 and $1,000
We’ve been discussing basic savings accounts in other savings plans throughout this guide. But what we’ve really been talking about is laying the foundation for financial independence.
In reality, there’s nothing even slightly exotic or complicated about achieving financial independence. But you do have to make a decision to pursue it. That starts with saving money in small amounts. $100, $500 and $1,000 is more than enough to get started.
As you can see from the various savings plans we’ve discussed, you actually have more options than you’ve probably ever imagined. Even with just a few hundred dollars, you can not only begin accumulating savings, but you can also enter into investing through robo-advisors and retirement plans.
The combination of the two is the “secret formula” for how ordinary people build large portfolios and finally reach financial independence. But you have to get started, and today is an excellent time to do it. Don’t let a relative lack of money stand in your way. You can start with as little as $100, and even if you don’t have that, you can do it through regular small contributions.
It may seem small and gradual, but it’s the only way to financial independence.