Before you
say “$100 is not a lot of money for anything,” consider that there are a few
strategic options you can use to grow $100 significantly.
For example,
while $100 may not seem like much today through the power of compounding it can
increase substantially.
Compounding
works by allowing your money to earn interest on interest effortlessly. In
other words, if you invest your $100 into the market and earn an average return
of +7% annually you will begin to see that account balance grow exponentially
over time.
In this
example, after the first year invested your account balance will be $107
dollars. Then, in the second year your +7% return will be calculated based on
this larger account balance of $107 which results in an ending value of
$114.49. Assuming an average return of +7% each year you can see how your
account has started to increase its earnings power by returning $7.49 in year
two after earning just $7 in year one.
Over time, the larger
the dollar amounts the more powerfully your account will grow.
Below are
several options for where you can stash $100 and let it work for you.
Brokerage Account
Opening an
online brokerage account can offer a few benefits.
First, you
will have the flexibility to invest your $100 however you wish. However, with $100
it is recommended that you invest in either individual stocks or Exchange
Traded Funds (ETF’s). Since some stocks may cost more than $100 you will be
trading fractional shares but still have an ownership stake in the underlying
company.
Alternatively,
an ETF blends the best attributes of a mutual fund and an individual stock. For
example, ETF’s provide diversification benefits that are similar to a mutual
fund by investing your money in an index like the Standard & Poor’s 500
Index. However, a major benefit to ETF investing is that it costs far less than
mutual fund investing, thereby keeping more money in your account to compound.
For most
investors starting out with an index-tracking ETF will be sufficient as it will
help you garner market-like returns for your portfolio by keeping your expenses
low.
Robo-advisors
Using a
robo-advisor is another viable option for your $100. Investors who would prefer
doing less work to manage and maintain their account would be better suited
with this option.
With a
robo-advisor your $100 will be invested by a company like Stash or Acorns based
on a series of questions you answer regarding your risk tolerance and goals for your money.
For example,
if you are saving for retirement the $100 will be invested with a long-term
target in mind and have a riskier portfolio of ETF’s than if your account was
being invested for a five-year goal where it would be important to have higher
certainty of reaching such a short-term target.
At first you
may not want to take on a riskier allocation of assets, however you will be
compensated appropriately for the additional risks. That is, in finance
additional risk yields additional reward. In other words, to extract an average
annual return from the market of roughly +7% you will need to build a portfolio
that is largely exposed to stocks and stock-based ETF’s mimicking market
returns.
Retirement
Accounts
The sooner
you start saving for retirement the earlier you can begin to take advantage of
the effects of compounding.
If you have
the option at your employer, participate in the company 401K program. 401K’s
are company-issued plans that make investing very easy for you. You determine
the amount to be deducted from your wages each pay period and choose the
investments. Alternatively, some companies have opted to automatically enroll
employees into a 401K program and an appropriate target-date mutual fund to
simplify the process of getting started.
Additionally,
the $100 could be used for an increase in your existing 401K contribution. Any
increase in the amount you save will get you that much closer to reaching your
financial goals.
If you are
self-employed or do not have a 401K option then opening an IRA will be your
best choice. An IRA will be self-directed like the brokerage account in the example
above. In other words, you are free to invest the money in products like stocks
and ETF’s of your choice.
Buy Books or
Online Courses
As Benjamin
Franklin once said, “An investment in knowledge pays the best interest.”
Follow the
advice of Ben and use your $100 to buy books or enroll in an online course that
will increase your knowledge on a subject matter. As a result, you will compound
your knowledge base and accelerate your learning curve thereby creating an edge
for yourself.
Additionally,
parents can give their kids financial incentive to read by rewarding for the
number of books read, the difficulty of content, as well as how well the new
information is applied. Despite its simplicity, this example may be the most
analogous to success in adulthood as acquiring knowledge and being able to
apply what was learned can lead to success.
Buy an Experience
or Travel
Another unique option for investing your $100 is to use the money to experience something new
or travel somewhere interesting.
This could
be as simple as a nice date night for you and your significant other at a
restaurant with friends. Or, another option would be to take a day trip to find
a great beach, lake, or mountain trail to explore.
Either way
you will be able to invest in enriching your life and the lives of others
around you with these experiences.
Key Takeaways
While $100
isn’t the largest amount to fund your investing, over time it will grow at an
increasing rate to become a meaningful stash. Through the process of
compounding your investment will begin to make considerable amounts of money in
interest alone each year eventually surpassing the initial $100 investment.
Aside from selecting
investment options like a brokerage account, 401K, or IRA you could invest the
$100 in your education or personal experiences. In the latter case, you will
compound personal growth that enriches your life and that of others around you.
No matter
which option you choose it’s best you get started soon.
As the
saying goes, “the best time to plant a tree was 30 years ago, the next best
time is right now.”
So put your
money to work and start taking advantage of compounding today.
As always,
please feel free to contact me with any questions or comments. Thanks for
reading!
John
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