How To Build Wealth With Just $100 a Month in Investments
Written by
Jordan Rosenfeld
Edited by
Molly Sullivan
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If wealth building sounds like something only people with hundreds of thousands of dollars can do, you might be excited to know that’s not true. Wealth building is as much about strategy and consistency as it is actual dollar amounts. The more consistently you put money toward a goal, the more likely you can turn it into more than you started with, and over time, transform that into wealth.
Michael Calamaras, a financial advisor with Northwestern Mutual, laid out what you need to know about how to build with with as little as just $100 per month in investments.
First, Consider Your Goals
Before you jump on looking for the right vehicle to save in, Calamaras suggested you first think about your capacity to save and your goals. Without knowing what the goal is, it’s hard to know which vehicle is the best one for that specific task, he explained.
“I always say every dollar needs a specific job. So the first thing would be to understand what are we trying to accomplish? Is it retirement at a certain date? Is it putting kids through school? Is it to buy a house one day?”
Consider Taxes
Another important key is to consider taxation when you save money. Putting money into a high-yield savings account won’t help reduce your taxable income, for example, but putting money into retirement accounts like Roth IRAs and 401(k) plans will.
And on that note, he said he is surprised how many people he encounters who are not enrolled in their company retirement plans, where employers match funds. “Where else can you put a dollar to get a dollar out for free and that dollar is tax deferred and will grow without any taxes on gains and all that?”
Lastly, he said it’s important that once money goes into a particular savings vehicle that it stays there until and if it’s time to be used. So, for example, you’re not pulling from retirement to buy a house — you might opt for a liquid brokerage account instead for such a thing.
Consider Your Age
If you’re investing money each month, the vehicle you choose for it may depend upon your age and your risk tolerance — in other words, how aggressive can you be with investments that have more volatility?
“So somebody who’s younger, let’s say in their twenties, has just a greater risk tolerance. Volatility becomes a little more scary when we get closer to retirement and more in the preservation phase of life,” Calamaras said.
Diversify Based on Your Risk Tolerance
Even if you do pick a specific vehicle to grow your wealth, be sure to diversify, which means all of your money isn’t tied up in only one asset, Calamaras advised. The aggressive investor might have an 80/20 portfolio (which is 80% equities and 20% bonds). Whereas somebody who’s a little more risk adverse, maybe further along in life, might have more of a 60/40 (60% equities and 40% bonds) mix.
More bonds means “less swing,” he explained. “But over time you’re going to get a much lower average growth rate.”
For people with a higher risk tolerance, he recommended more equities. For people who want more of a balanced approach, they’ll want to have stocks with a mixture of “large cap and small cap” along with real estate, commodities and bonds.
With a lower risk tolerance, such as those who are closer to retirement, you want to be careful to have some money in cash, and invest in a way that is “as efficient as possible with the dollars you have.”
Of course, all of these situations are helped along with the oversight of a financial professional, he explained.
Automate Your Investments
What matters most is that you invest consistently, and automating allows you to do this without having to think twice about it. This allows you to engage in what is called “dollar cost averaging.” He explained that every month you put in your $100 and you don’t change that based on whether the market is up or down.
“I’m still going to put in a hundred bucks and when the market’s bad, I’m just going to buy more shares at a discount because the market’s down and the market’s good, I’m going to buy less shares at a premium. And my average cost into the market over time will be less than the overall long-term value.”
Trust Market Cycles
Additionally, while market declines can feel scary, especially when you see your portfolio value dip, he reminded that when you invest for the long term, market corrections tend to make up for any down periods. “Historically, the market’s been positive a hundred percent of the time. So over long-term periods, we get growth.”
Just be consistent about savings, and don’t panic at any dips. “So it’s like anything in life, you go to the gym once a week or once a month, you’re not going to really see results, but if you go regularly, you’re going to see results. Same thing with saving.”
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