How to invest small sums of cash

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Topic Author
Scott927
Posts: 15
Joined: Fri Aug 10, 2012 12:27 pm

How to invest small sums of cash

Post by Scott927 »

Hello,

I'm 35, a total novice investor and just getting to a point where I have extra cash to invest for retirement/future needs. I have no debt and plenty of money in an emergency fund. My employer doesn't match 401k funds, so I maxed out my Roth IRA this year (first year doing so). For now, I've put it all in VFINX (Vanguard S&P 500 Index Fund).

I also opened a brokerage account and get around $300/month auto-deposited to it that I'd like to invest somehow. How should I invest these smaller sums of money on a monthly basis? I like index funds but most of the minimum investments are around $3,000 and I'd prefer not to wait 10 months to invest. However, I also don't want to overpay on commissions/fees for a lot of small trades. Again, I'm a complete novice here so I'm not sure what specifically to ask, but the bottom line is that I'd like to find a way to invest these small sums of money each month so my cash isn't just sitting there earning nothing.

Any suggestions? Thanks in advance.
allsop
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Joined: Sun Jun 15, 2008 7:08 am

Re: How to invest small sums of cash

Post by allsop »

Several Vanguard funds have a minimum of $3000 for the first investment but after that the subsequent investments are far lower, but that you have to look up on the Vanguard site for details.

So, put the money into high yield FDIC insured (or similar) online bank accounts until you have $3000 and then invest in your desired Vanguard fund.
NYBoglehead
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Re: How to invest small sums of cash

Post by NYBoglehead »

Scott,

You can buy S&P 500 and Total Market Index ETFs (along with all the others, but the ERs are a little higher and we don't like to market time/pick winners) with Vanguard commission free if you'd rather not wait to accumulate the $3,000. That said, if you've got plenty large enough of an emergency fund it might make sense to take the $3,000 out of that and gradually replenish until you get back to the number you want. Just a thought on that.

Secondly, just because your employer doesn't match your 401k contributions doesn't mean it doesn't make sense not to contribute. After maxing out your Roth IRA, a 401k allows you to accumulate assets tax-deffered and at the same time lower your current tax liability. You need to run your own numbers, but there is a chance you can move down a tax bracket, at the very least you are deferring the money into the future when your income and along with it your tax liability will be lower. Only if the funds don't stink though, in my opinion.

Good Luck!
Topic Author
Scott927
Posts: 15
Joined: Fri Aug 10, 2012 12:27 pm

Re: How to invest small sums of cash

Post by Scott927 »

allsop wrote:Several Vanguard funds have a minimum of $3000 for the first investment but after that the subsequent investments are far lower, but that you have to look up on the Vanguard site for details.

So, put the money into high yield FDIC insured (or similar) online bank accounts until you have $3000 and then invest in your desired Vanguard fund.
Thanks for the reply. I would assume that the $3k minimum applies to each account. The Roth IRA has $5k invested in VFINX, but my brokerage account has $0 in VFINX. That'd be great if my $5k from the Roth covered my $3k min on the brokerage account, but I'm not too hopeful on that. I'll check though, thanks.
mackstann
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Re: How to invest small sums of cash

Post by mackstann »

Target Retirement funds have $1000 minimums.
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Topic Author
Scott927
Posts: 15
Joined: Fri Aug 10, 2012 12:27 pm

Re: How to invest small sums of cash

Post by Scott927 »

NYBoglehead wrote:Scott,

You can buy S&P 500 and Total Market Index ETFs (along with all the others, but the ERs are a little higher and we don't like to market time/pick winners) with Vanguard commission free if you'd rather not wait to accumulate the $3,000. That said, if you've got plenty large enough of an emergency fund it might make sense to take the $3,000 out of that and gradually replenish until you get back to the number you want. Just a thought on that.

Secondly, just because your employer doesn't match your 401k contributions doesn't mean it doesn't make sense not to contribute. After maxing out your Roth IRA, a 401k allows you to accumulate assets tax-deffered and at the same time lower your current tax liability. You need to run your own numbers, but there is a chance you can move down a tax bracket, at the very least you are deferring the money into the future when your income and along with it your tax liability will be lower. Only if the funds don't stink though, in my opinion.

Good Luck!
Thanks for the reply! I'm not sure I want to dip into the emergency fund because I already did that to max out the Roth IRA and I don't want to set a habit of loaning myself money from my emergency funds. I'll look into the ETFs, I've heard a little about them but don't have much knowledge on them.

As an aside, both of the replies I've gotten so far have revolved the index funds I've expressed interest in. I should clarify, I'm open to investment options other than index funds if anyone has suggestions on moderate to moderate/aggressive investments I can make that don't cost a lot so that I don't get killed on commissions/fees.
jmg229
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Re: How to invest small sums of cash

Post by jmg229 »

To reiterate what NYBoglehead mentioned, is there a reason why you are avoiding investing in the 401k? The fact that your employer doesn't match is a good reason to invest in the Roth IRA first, but not a reason (by itself) to invest in taxable accounts before the 401k. Is there some other reason you are avoiding the 401k?
livesoft
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Re: How to invest small sums of cash

Post by livesoft »

Just use index funds in their ETF form. Many brokers do not charge commissions for some ETFs, does yours?

But I would contribute $22,500 to my 401(k) before I invested in a taxable brokerage account. You should contribute $17,000 to your 401(k) every year.
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Topic Author
Scott927
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Re: How to invest small sums of cash

Post by Scott927 »

jmg229 wrote:To reiterate what NYBoglehead mentioned, is there a reason why you are avoiding investing in the 401k? The fact that your employer doesn't match is a good reason to invest in the Roth IRA first, but not a reason (by itself) to invest in taxable accounts before the 401k. Is there some other reason you are avoiding the 401k?
No, there is no real reason (except possibly lack of experience/understanding). The money I'm looking at investing is not coming from my employer (it's Google Adsense revenue from a website I run). I was under the impression that 401k contributions (being tax-deferred) would have to come out of my paycheck directly and deposited instead to a 401k by my employer. Now, having said that, I could obviously have my employer deduct the funds and just direct my Adsense revenue to my checking account as a replacement for the paycheck deductions.

Also, here's a question about 401k...I'm a software engineer and the nature of this industry leads to a job switch once every few years or so. What happens if there comes a time when I'm employed by a company who doesn't offer a 401k at all, or I go self-employed for a while? What happens to my 401k then?

Bottom line is it sounds like the advice I'm getting is to max out a 401k before I even think opening about a taxable brokerage account. So the preferred order of investing for retirement then would be something like this?

1) 401k with employer matching up to max match amount ($0 in my case).
2) Max out Roth IRA
3) Max out 401k
4) Taxable brokerage account

I'm getting a LITTLE off my original topic of WHAT investments to put small sums of money into rather than which type of account to use, but it's still useful information for me.

Thanks.
jmg229
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Re: How to invest small sums of cash

Post by jmg229 »

Scott927 wrote: Now, having said that, I could obviously have my employer deduct the funds and just direct my Adsense revenue to my checking account as a replacement for the paycheck deductions.
This is what I would recommend.
Scott927 wrote:Also, here's a question about 401k...I'm a software engineer and the nature of this industry leads to a job switch once every few years or so. What happens if there comes a time when I'm employed by a company who doesn't offer a 401k at all, or I go self-employed for a while? What happens to my 401k then?
You should be able to roll the 401k over into an IRA when you leave this employer. Search the forum for 401k rollovers for more info.
Scott927 wrote:Bottom line is it sounds like the advice I'm getting is to max out a 401k before I even think opening about a taxable brokerage account. So the preferred order of investing for retirement then would be something like this?

1) 401k with employer matching up to max match amount ($0 in my case).
2) Max out Roth IRA
3) Max out 401k
4) Taxable brokerage account
Yes, this is the typical suggestion made and the one that I think makes the most sense in most situations.
Scott927 wrote:I'm getting a LITTLE off my original topic of WHAT investments to put small sums of money into rather than which type of account to use, but it's still useful information for me.
To get to this, we'd have to know what your desired asset allocation is and what you have for options in the 401k. Check out the sticky on this forum for the proper format. If you haven't determined an asset allocation, do some reading on the wiki about developing an IPS (Investment Policy Statement) and do some background reading.

Good Luck.
aida2003
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Re: How to invest small sums of cash

Post by aida2003 »

Isn't is STAR fund of Vanguard at min.$1K to open? That's a reasonable fund to start for accumulating to $3k and more. Or you can open an index fund with Schwab that require $100 minimum and low ER. I haven't invested with this company, but I think it's respectable.
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Toons
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Re: How to invest small sums of cash

Post by Toons »

"Isn't is STAR fund of Vanguard at min.$1K to open? That's a reasonable fund to start for accumulating to $3k and more. "


+1 Good Idea :happy
"One does not accumulate but eliminate. It is not daily increase but daily decrease. The height of cultivation always runs to simplicity" –Bruce Lee
Default User BR
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Re: How to invest small sums of cash

Post by Default User BR »

aida2003 wrote:Isn't is STAR fund of Vanguard at min.$1K to open?
So are the target retirement funds, and tend to be recommended more these days.


Brian
Blueflame1979
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Re: How to invest small sums of cash

Post by Blueflame1979 »

I dont mean to hijack the thread and go off topic maybe it might still be on topic, but Im a little confused, many people especially here, recommend Roth IRA And a couple of people mentioned the Target retirement fund from Vanguard. Now, my question is, Does funding either account only for the benefit of retirement or can it be used for other reasons? I know how important it is to plan and fund for retirement, but I have a few short term goals, well shorter than retirement. I already have a 401k with a company match, but I want to know if the first two funds that I mentioned if they can be used for other reasons than retirement and if the roth IRA and the target retirement fund have any tax benefits. Again Im sorry for going off topic but since Roth Ira and the target retirement fund are known for funding retirement I wanted to know if they had other uses or benefits. Thanx.
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Alskar
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Re: How to invest small sums of cash

Post by Alskar »

Scott927 wrote:Again, I'm a complete novice here so I'm not sure what specifically to ask, but the bottom line is that I'd like to find a way to invest these small sums of money each month so my cash isn't just sitting there earning nothing.

Any suggestions? Thanks in advance.
The others have already addressed the question of which account to fund first. I thought I'd have a crack at your original question: How to invest small sums of cash

I have two suggestions:

Fidelity offers about 30 iShare ETF's that are free to trade on the Fidelity platform. Here's the list: http://personal.fidelity.com/products/t ... gory.shtml Using just a few of these you can construct a portfolio with your desired asset allocation. I use IWV (Russell 3000) for the US Equity portion, ACWX (All world ex-US) for the international portion, and a mix of AGG or TIP for the fixed income portion. Once you get enough in these funds to make it worthwhile, you can sell these ETF's and buy Vanguard ETF's with lower ER. I use VTI for US, VXUS for international, and BND for fixed income. Trades are $7.95 each at Fidelity.

You can do the same thing at Vanguard, using Vanguard ETF's. Vanguard ETF's trade for free when purchased through a VBS account. I still use VTI, VXUS, and BND.

The choice between Vanguard and Fidelity is based on your preferences. Vanguard Brokerage Services (VBS) has no local offices and in my experience somewhat poorer customer service, and a clunky website but one doesn't have to go through the step of accumulating iShares ETF's before purchasing Vanguard ETF. Fidelity has excellent customer service (IME), local offices, and an excellent website, but they charge $7.95 per trade which makes buying $100 worth of ETF's kind of expensive.

YMMV. Hope that helps!
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bayview
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Re: How to invest small sums of cash

Post by bayview »

Scott927 wrote: ... As an aside, both of the replies I've gotten so far have revolved the index funds I've expressed interest in. I should clarify, I'm open to investment options other than index funds if anyone has suggestions on moderate to moderate/aggressive investments I can make that don't cost a lot so that I don't get killed on commissions/fees.
Have you read these?

http://www.bogleheads.org/wiki/Boglehea ... philosophy <-- Boglehead wiki explaining the thinking behind BH investment philosophy, controlling costs, and especially why you might want to stick with index funds,

and

http://www.bogleheads.org/wiki/Three_fund_portfolio <-- Boglehead wiki discussing Three Fund Portfolio,

and

http://www.bogleheads.org/forum/viewtop ... 10&t=88005 <-- thread discussing Three Fund Portfolio.

There's a lot to be said for promising yourself to keep things simple for the first year. With luck, at the end of that year, you'll realize that this works as well as you need it to do.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri
Johm221122
Posts: 6395
Joined: Fri May 13, 2011 6:27 pm

Re: How to invest small sums of cash

Post by Johm221122 »

Blueflame1979 wrote:I dont mean to hijack the thread and go off topic maybe it might still be on topic, but Im a little confused, many people especially here, recommend Roth IRA And a couple of people mentioned the Target retirement fund from Vanguard. Now, my question is, Does funding either account only for the benefit of retirement or can it be used for other reasons? I know how important it is to plan and fund for retirement, but I have a few short term goals, well shorter than retirement. I already have a 401k with a company match, but I want to know if the first two funds that I mentioned if they can be used for other reasons than retirement and if the roth IRA and the target retirement fund have any tax benefits. Again Im sorry for going off topic but since Roth Ira and the target retirement fund are known for funding retirement I wanted to know if they had other uses or benefits. Thanx.
Retirement series funds are not tax efficient, but besides this they could work for other than retirement investing.You may want to look at I bonds or tax exempt bonds(municipal). Stocks only if long term.It may be best to ask your own question
Johm221122
Posts: 6395
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Re: How to invest small sums of cash

Post by Johm221122 »

Scott927 wrote:Hello,

I'm 35, a total novice investor and just getting to a point where I have extra cash to invest for retirement/future needs. I have no debt and plenty of money in an emergency fund. My employer doesn't match 401k funds, so I maxed out my Roth IRA this year (first year doing so). For now, I've put it all in VFINX (Vanguard S&P 500 Index Fund).

I also opened a brokerage account and get around $300/month auto-deposited to it that I'd like to invest somehow. How should I invest these smaller sums of money on a monthly basis? I like index funds but most of the minimum investments are around $3,000 and I'd prefer not to wait 10 months to invest. However, I also don't want to overpay on commissions/fees for a lot of small trades. Again, I'm a complete novice here so I'm not sure what specifically to ask, but the bottom line is that I'd like to find a way to invest these small sums of money each month so my cash isn't just sitting there earning nothing.

Any suggestions? Thanks in advance.
You would get better answer if you use asking portfolio question format
http://www.bogleheads.org/wiki/Asking_p ... _questions
Especially 401 choices and tax rate
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