The Poor Gal's Guide to Investing Money

It's all well and good for financial experts to tout the wealth-building benefits of investing. But what if you don't have a hunk of cash to invest with? Surprise: You don't actually need a lot of money to save for the future; you just need to know how to get started. Here, what you should know about putting whatever money you have to work for you.

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Your Bottom Line
Your first step on the investment path should be a retirement account, such as a 401(k) or IRA. Many employers offer 401(k)s, which allow you to automatically deduct money (pretax) from your paycheck to invest in the stock market. If your job doesn't offer a 401(k), open an IRA through a brokerage such as Fidelity Investments or Charles Schwab.
How much you need: You can put as little as 1 percent of your salary in a 401(k), but most financial experts recommend that you contribute at least 10 percent. Minimum investments for IRAs range from $200 to $2,000, but some firms, such as TIAA-CREF, don't require a minimum initial investment, as long as you agree to have $50 each month automatically deposited.

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Once you've set up your retirement account, consider other investment options; choose the best for your money style.

If You're Risk Averse
Certificates of deposit (CD) and money market deposit accounts are good for those who don't want to take any risk, since both are FDIC-insured: Even if the bank goes under, you'll get your money back - with interest (up to $100,000). With CDs, the bank keeps your money for a set term up to five years - the longer the term, the more interest you earn. With a money market deposit account, which pays around 3 percent, the bank simply limits how many withdrawals you can make (typically six per month).
How much you need: Many banks require a minimum deposit of $500 for either CDs or money market accounts, but with ING (ingdirect.com), you can open a one-year CD with just $1, and capitalone.com offers a money market account with a $100 minimum initial deposit. We recommended socking away all those little bits you save - you'll be surprised how fast they grow!

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U.S. Savings Bonds are a loan you make to the government for 5 to 30 years, which you recoup with interest at the end of the term. Bond interest rates change regularly, but you're locked into the rate offered on the day you purchase the bond. A bonus: The interest is exempt from state and local taxes - and you can defer federal taxes until you cash them in (a good idea if you think you'll be in a lower tax bracket later). Or, if you use the bonds to pay for higher education, you may not have to pay taxes on them at all.
How much you need: The minimum savings bond is $25 and the maximum is $5,000.

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If You Are Okay with a Little Risk
Mutual funds, which consist of various stocks, real estate investments, bonds or cash, have a slightly higher risk quotient (which could potentially give you greater returns) than CDs and bonds, but are safer investments than individual stocks because the money is spread across many different companies. For riskier mutual funds, like those invested entirely in stocks, you should plan not to touch your money for at least five years so that it has a chance to ride out the ups and downs of the market.
How much you need: Most mutual funds require a minimum initial investment of $2,500, but some companies, such as T. Rowe Price, waive that minimum as long as you set up an automatic monthly deposit of $50 into your account. Make a deal with your man to share the contributions so your money grows even faster.
Beginner tips:

  • Ask if the fund you want is "proprietary" to the company, which can help you save on high administrative fees that you're likely to pay when buying from a third-party brokerage.
  • Consider index funds, which invest in the companies in a given stock index (a group of companies that share similar characteristics, such as size or industry type). Because there's relatively little management involved, the fees are lower than with other types of mutual funds. Plus, stock index funds are generally regarded as even safer bets than other types of stock-only funds because they invest in such a wide array of companies.
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If You're a Daredevil
Buying shares of individual stocks in a company seems like a simple way to invest, but it's a risky business, even for seasoned money managers. Do research on various companies' past performance and future prospects at sites like The Motley Fool (fool.com) or financeyahoo.com and get to know the company itself: what it does, how it works, its reputation, etc. Begin with companies you know so you have some real-world understanding of the company, which will help you with research.
How much you need: $20 per month
Beginner tips:
  • Dividend reinvestment plans (DRIPs) are a great way to get your feet wet. For as little as $20 per month (after a start-up fee of $40 per investment), you can buy stock that pays dividends (a portion of the company's profits that gets passed on to shareholders). If a single share of the stock you want costs more than what you can contribute, you're sold whatever percentage your money can buy, and your dividends are automatically reinvested, so your holdings can grow quickly. For a complete list of companies that offer DRIPs, and how to buy them, visit directinvesting.com.
  • Once you get the hang of DRIPs, you can buy other stocks to grow your portfolio. Buying stocks through an online discount broker, such as Charles Schwab, Scottrade or ShareBuilder, means you pay lower fees than you would with a full-service broker, such as Merrill Lynch or Morgan Stanley.
  • Although all the details involved with investing may seem overwhelming at first, you'll learn as you go. "It doesn't matter how little you have," says Jeff Seely, CEO of ShareBuilder. "Just get started - investing small amounts of money on a regular basis can have powerful results over time."

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