Investing with Small Dollar Amounts

by Barbara O'Neill, Ph.D., CFP

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Editor's Note: Exerpted from "Basic Investing Home Study Course" sponsored by Rutgers Cooperative Extension in cooperation with the Cooperative State Research, Education, and Extension Service of the U.S. Department of Agriculture, and the U.S. Securities and Exchange Commission. For the entire course visit

Unfortunately, and erroneously, many people think that they need a substantial sum of money to start investing. This is simply not the case. The objective of this unit is to demonstrate that investing is possible, even on a "shoestring" budget. Investing is possible with as little as $25 (e.g., a U.S. savings bond), and a variety of investments (e.g., Treasury securities, unit investment trusts, and many mutual funds) are available for an initial outlay of $1,000 or less. Once you've taken care of "the basics" (e.g., reduced household debt, purchased adequate insurance, and set aside an emergency reserve of at least 3 months' expenses), you are ready to explore affordable investment options. This way, your money will earn a higher rate of return over time than a certificate of deposit or passbook savings account to help you achieve important financial goals. This unit will discuss investments that can be purchased for a thousand dollars or less and are suitable for beginning investors whose largest asset is their future earning ability.

Most families can set aside $20 a week. While this may not sound like a lot of money, over time it really adds up. At a 5% annual real rate of return, an investor would have $36,100 more than they would otherwise have in 20 years ($65,500 with a 10% return), according to the Employee Benefit Research Institute. In 30 years, the figures for 5% and 10% returns are $72,600 and $188,200, respectively, and, in 40 years, the figures are even more dramatic: $131,900 with a 5% return and $506,300 when $20 per week is invested to earn 10%.

Getting Started: Investing Tax-Deferred

If saving for retirement is one of your financial goals, a good place to start investing is a tax-deferred employer retirement plan [e.g., 401(k)s and 403(b)s]. (See Unit 7 of the online course for more information.) Many employers require only a minimum deposit amount (e.g., $10) per paycheck or a low percentage (e.g., 1 or 2%) of pay to enroll.

Three advantages of employer savings plans are:

  • A federal tax write-off for the amount contributed (e.g., if you contribute $1,000, you do not pay tax on this income)
  • Tax-deferred growth of principal and investment earnings
  • Automatic payroll deduction.

In addition, almost 80% of 401(k) plans and about 30% of 403(b)s provide employer matching. For every dollar a worker contributes, an employer might contribute a quarter, fifty cents, or even a dollar. This is "free money" that should not be passed up.

The beauty of investing in employer plans is that you are using pre-tax dollars. For every dollar you invest, Uncle Sam subsidizes this investment by that amount multiplied by your tax bracket. For example, if you contribute $1,000 to an employer plan and are in the 15% marginal tax bracket, your after-tax cost is only $850 ($1,000 x $1,000 x 0.15). In the 28% marginal tax bracket, the out-of-pocket cost is even less: $720 ($1,000 x $1,000 x 0.28). Most employers adjust workers' withholding to reflect this tax savings, thereby freeing up more money in each paycheck to invest. In addition, taxes are deferred on investment earnings, which provides increased growth of principal over time.

If you don't have an employer plan, or have "maxed out" contributions to an employer plan and are looking for another tax-deferred investment, consider an individual retirement account (IRA). The good news for IRA investors with small dollar amounts is that you don't have to invest the maximum allowable contribution ($2,000) all at once. You simply need to meet the minimum amounts (e.g., $250 or $500) required for the investments you select (e.g., a zero-coupon bond or mutual fund).

Buying Stocks With Small Dollar Amounts

Not too long ago, to build a diversified portfolio of stocks, you may have needed $30,000 to $50,000 or more. That was the cost to purchase a round lot of 100 shares of each of 10 or 12 different stocks at an average cost of $30 to $50 per share. Today, thanks to the popularity of investment clubs and the increase in both online trading and stocks that can be purchased directly from sponsoring companies, you can make a purchase for far fewer dollars. Making small stock purchases no longer has to be costly or embarrassing (e.g., asking a broker to trade a few shares), as it used to be. Direct stock investing today is easy and affordable.

Investment clubs generally assess members from $25 to $100 monthly, which is pooled to make club stock purchases. The amount of "dues" is decided by individual clubs based on the preferences of their members. Some investment club members also choose to invest additional dollars above the required amount.

DRIPs and DPPs appeal to investors who are willing to do their own research rather than consult a broker. There are several helpful references available for investors who wish to learn more about purchasing stock directly from issuing companies. Among them are the books No-Load Stocks and Buying Stocks Without a Broker by Charles B. Carlson and the Web site

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Buying Fixed Income Investments

Fixed-income investments are securities that provide regular interest or dividend payments and, in many cases, a return of principal at maturity. Their primary objective is income with limited, if any, growth potential. As noted in unit 5, the rate of return on a fixed-income investment can be fixed throughout its holding period (e.g., bonds) or can fluctuate with the general movement of interest rates (e.g., series EE U.S. savings bonds and money market mutual funds).

Most fixed-income investments, including all marketable U.S. Treasury securities purchased since August 1998, require a minimum purchase of $1,000 or less. Generally, the longer the maturity date, the higher the rate of interest a Treasury security (and all bonds) pay, because an investor's money is "tied up" (subject to interest rate fluctuations and unavailable to invest elsewhere) for a longer period of time.

Interest earned on Treasury securities is exempt from state and local income taxes. Another characteristic is that, like all bonds, Treasuries are subject to interest rate risk (when interest rates rise, bond prices decrease and vice versa). Treasury securities can be purchased from a bank or brokerage firm with a $50 to $75 fee or directly from the Federal Reserve System's "Treasury Direct" program at no charge. For additional information, contact the Bureau of the Public Debt at 202-874-4000 for the location of the nearest Federal Reserve Bank or the Web site

Corporate bonds can also be purchased in denominations of $1,000. These are IOUs issued by for-profit companies. Like Treasury securities, investors deposit a sum of $1,000 or more and receive a fixed amount of interest at regular intervals, generally every 6 months. For example, an investor holding a corporate bond paying 7% interest would receive $70 in two semi-annual payments of $35.

Another type of fixed-income investment that can be purchased with a small dollar amount is a zero-coupon bond (a.k.a., zeros). These are bonds issued by certain levels of government (local, state, and federal) or corporations at a deep discount to face value. Unlike other bonds that pay semi-annual interest, zero-coupon bonds don't pay out anything until maturity, at which time an investor receives the face value, generally $1,000.

For more savings: Starting an IRA

Series EE U.S. Savings Bonds and I Bonds are also well suited to those with small dollar amounts. I-Bonds are an inflation-adjusted savings bond introduced by the Treasury Department in September 1998. Like inflation-adjusted marketable Treasury securities that were introduced in 1997, the principal amount of I Bonds is adjusted annually for inflation. I Bonds are available at most commercial banks and many other financial institutions.

Unit Investment Trusts:
Diversification For $1,000

Unit Investment Trusts (UITs) are a low-cost diversified investment product that can include either fixed-income securities (e.g., municipal bonds, Ginnie Maes) or stock. UITs are sold to investors by brokerage firms in small denominations called units. The cost of a unit is generally $1,000. The securities that comprise a UIT are professionally selected and of a similar type (e.g., investment grade municipal bonds with 30-year maturities). Unlike mutual funds, however, UITs are not professionally managed. Instead, the securities in the portfolio are simply held to maturity to generate interest or dividends, which are periodically distributed proportionately to investors.

Mutual Funds: A Shoestring Investor's Friend

Mutual funds are a professionally managed portfolio of securities such as stocks, bonds, and real estate investment trusts that are sold to investors in units called shares. The market price of fund shares fluctuates daily in response to market conditions and the performance of securities within a fund. Unlike UITs, mutual fund portfolios are always in a state of flux as securities are bought and sold. Unless they are closed to new investors, mutual funds are constantly receiving "new money" from investors and also must meet shareholder redemptions upon request.

The amount of money required to purchase shares in a mutual fund varies considerably. Some funds require an initial investment of $250 or $500 (or less), while others require $10,000, or even $25,000, to open an account. Like banks, mutual funds are free to set their own purchase and redemption policies. Unfortunately, many mutual funds with low initial minimums also have high expense ratios (the percentage of fund assets deducted annually for management and operational expenses). Therefore, in addition to the initial investment amount, fund expenses, objectives, and historical performance also need to be considered when making a selection.

Mutual funds, recognizing that they are encouraging a long-term relationship, generally provide a price break or waive their minimum account requirements completely for automatic investment programs. For example, many Fidelity funds require $2,500 to open an account and $250 for subsequent deposits. Investors who enroll in Fidelity's "Automatic Account Builder"SM investment plan still need $2,500 for a regular account, and $500 for retirement accounts, but only $100 for subsequent deposits, which can be made monthly or quarterly.

Barbara O'Neill, Ph.D., holds the rank of full professor in the Family & Consumer Sciences Department at Cook College, Rutgers University. She has been a family and consumer sciences educator in Sussex County, New Jersey since 1978 and is a certified financial planner (CFP), an accredited financial counselor (AFC), and a certified housing counselor.

Exerpted from "Basic Investing Home Study Course" sponsored by Rutgers Cooperative Extension in cooperation with the Cooperative State Research, Education, and Extension Service of the U.S. Department of Agriculture, and the U.S. Securities and Exchange Commission. For the entire course visit

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