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How To Get Started Investing When Affordability Is Such An Issue

It's never been easier to start investing with a small amount of money. Many brokerage accounts have no minimum deposit requirement, fractional shares let you invest a few dollars at a time and automatic investments can move money into the market without you needing to lift a finger. Unfortunately, finding those few extra dollars to invest has rarely felt harder.

If that resonates, know that you don't need to force investing into a budget that can't support it. You just need to determine what you can afford and use the tools that make it possible to begin with far less money than you might think.

"There is no minimum amount required to get started investing," says Mike McCulloch, a certified financial planner and investment adviser at Hunter Associates. "The key is simply to start."

Here is how to start investing even when it feels unaffordable.

Figure out what you can actually afford to invest

The fact that you can start investing with only a few dollars doesn't necessarily mean those dollars should be invested. If you're struggling to cover regular expenses or would have to put an unexpected bill on credit, building a little financial breathing room may deserve priority.

"The early steps are unglamorous: build a small financial cushion and establish one or two basic money habits," says Jarrad Hubbard, senior director of GTM and partnerships at global workplace platform Stream. "For most, this simply means creating enough financial stability to start thinking beyond the next paycheck."

How much of a cushion you need depends on your circumstances. McCulloch says a good rule of thumb is to keep three to six months' worth of living expenses in a bank account or another conservative, accessible vehicle. But if you're starting from little or no savings, think of that as a goal to work toward, not an admission ticket to start investing. You might start by building a smaller emergency buffer, then continuing to build it while investing modest amounts.

Paying off high-interest debt should also be part of the calculation. For example, imagine a balance on a credit card with 20% APR. "If you invest money instead of paying down that balance, your investment would need to earn more than 20% just to come out ahead," McCulloch says. Since stock market returns are erratic, paying off high-interest debt can be a better use of spare cash.

The most important question is if the money you're investing can realistically stay invested. "The goal isn't perfection," Hubbard says. "It's enough stability that investing for tomorrow doesn't come at the expense of getting through today."

If your employer offers a 401(k) match, start there

One important exception to the idea that your emergency fund and high-interest debt should always come first is a workplace retirement plan with an employer match.

For example, your employer may contribute 50 cents for every $1 you put into your retirement plan up to 6% of your pay. In this case, contributing 6% of your paycheck would allow you to capture the full available match.

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"If your employer offers a matching contribution and you're not contributing enough to receive the full match, you're effectively turning away free money," McCulloch says.

That doesn't mean a match should override essentials like rent or groceries. But if your budget allows it, contributing enough to receive the full match can be one of the most valuable steps you take as an investor, even while you're still building an emergency fund.

Use zero-minimum accounts and fractional shares to start small

When investing outside of a workplace plan, look for an account that doesn't require a large deposit to open the account. Many firms such as Fidelity, Charles Schwab, Vanguard and E*TRADE now offer accounts with no minimum to open. That doesn't necessarily mean every investment available through the account has a $0 minimum. Individual funds and other securities can have their own purchase requirements.

Fractional shares can lower that second hurdle. Instead of having to buy one whole share of a stock or exchange-traded fund (ETF), some brokerages let you invest a specific dollar amount. For example, if an ETF trades for $100 per share but you only have $10 to invest, a brokerage offering fractional shares may let you buy one-tenth of a share.

Fractional share policies vary by firm, however, and not every stock or ETF is necessarily eligible. So be sure you understand a broker's full policy before opening an account.

You also don't need to build a portfolio one stock at a time. A mutual fund or ETF can hold hundreds or even thousands of companies, allowing even a small investment to provide broad market exposure.

Automate an amount you can sustain

When money for investing is tight, consistency matters more than starting with a large sum. A $25 monthly contribution you can maintain is often more useful than waiting to invest $200 and never investing again.

"The goal should be to make good financial habits as easy and automatic as possible," Hubbard says. "Automating even a small amount directly from a paycheck can help turn saving from a decision you have to make every two weeks into a habit that happens in the background."

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One way to do that is by setting up automatic contributions from your paycheck or bank account. Start with whatever amount fits comfortably in your budget, even if it's only $10 or $25 per month, and increase it as your financial circumstances allow.

Just make sure whatever money you put into your investment account is actually invested. Depending on the account, contributions may enter the account as cash and stay there until you buy an investment.

"I've seen people with the best intentions, regularly contributing toward retirement, only to discover years later that the money was sitting in cash rather than invested for long-term growth," McCulloch says.

Don't wait for the "perfect" time to start

Finally, there's a difference between waiting to invest because you genuinely can't afford it and waiting until every part of your financial life is perfectly organized. Once you have some financial breathing room and money you can leave invested for the long term, you can start investing.

Your first contribution doesn't have to be the amount you contribute forever. When affordability is the obstacle, the most realistic investing plan is often not the one that requires you to do the most today, but rather the one you can keep doing tomorrow and beyond.