how to invest small amounts of money
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How to Increase Wealth by Investing a Small Amount of Money

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Sep. 24 2020, Published 1:54 p.m. ET

Some investors have a misconception that you need a big sum of money to start investing. However, it is not exactly true. If you have a small amount of money and yet want to invest, you can take heart in the fact that Warren Buffett, who made all his wealth by investing, also started small. The Oracle of Omaha began investing in 1942 with little more than $100. He started his first company in 1956, again with $100 of his own, which he pooled with $105,000 from seven investing partners. Can you also invest a small amount of money and get rich?

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How best to invest a small amount of money

First, develop a habit of saving more from your income. One approach, coined by Robert Kiyosaki, author of Rich Dad Poor Dad, is the “pay yourself first” principle. In a nutshell, Kiyosaki advises you to set aside money for investing before paying off your expenses. That said, if you have outstanding high-cost debts like credit cards, you should first pay off those. Buffett also advised on similar lines at this year’s annual shareholder meeting.

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Begin by opening a high-yield savings account. While it won't help grow your money much, you will still earn something extra compared to the usual bank account. Also consider peer-to-peer lending platforms that can help you earn extra money.

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How to invest a small amount of money in stocks

Over the long term, stock markets give the highest returns compared to other asset classes. There are many ways to invest in stock markets, such as purchasing direct stocks, investing in ETFs, or buying mutual funds. However, most mutual funds require a high minimum investment. Also, some shares have a high price. For instance, an Amazon share is around $3,000. Before the split last month, Tesla stock was also around $2,000.

Nevertheless, a high share price is not a deterrent now, because you can buy fractional shares. You can open a trading account with a low-cost broker like Robinhood and buy fractional shares. This way you can invest in stocks that otherwise have a prohibitively high price. You can also buy ETFs, which do not have a minimum investment amount like mutual funds.

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You may also supplement your initial corpus by borrowing money. That said, leverage is a double-edged sword and you might end up losing more than your initial corpus. You should invest on borrowed money only if can take the risk. Most financial advisors advise against investing in borrowed money.

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How best to invest your small amount of money

Crowdfunding is another way to invest a small amount of money. Many start-up companies look to crowdfunding to raise capital. Also, while you may not be able to buy real estate directly with a small amount of money you can also invest in real estate through crowdfunding.

Finally, how much you invest is ultimately a function of your income and expenses. You should strive to increase the investable surplus gradually by increasing your income and cutting down on some expenses. There are many ways you can supplement your income even in a recessionary environment.

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Also, as you start investing small sums of money, you should learn to be patient. Going back to Warren Buffett’s example, he sold his first stock at a gain of $2 per share. However, the stock rose sharply afterward, teaching Buffett a valuable lesson about patience. If you stay invested for a long time, the power of compounding, which Albert Einstein called the “eighth wonder of the world” comes into play.

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