Okay, so say you’re ready to invest. You’ve either paid off all your debts, or you’re not going to listen to me and want to get started now, regardless. Either way, I’ve got your back.
Let’s also say that you’re starting out on your own, and not going through an employer-sponsored account. (I’m delineating this because there are different considerations that I can tackle in another post.)
With this in mind, how much do you need to get started? $500? $1,000? $10,000? While the answer does depend on a number of different considerations, when you factor in some best practices, the answer is clear.
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Don’t get crafty
First of all, our rule here is “Keep it simple”. You’re just getting started, so you don’t need to get too crafty.
Let’s assume that we’re working with a Roth IRA here. It’s not that things are so different with a Traditional IRA, but I like Roths, and in most cases that’s what you want to start.
Narrow down the company
You have a number of options on “where” to start your IRA. There are pros and cons to many of these firms, but we can eliminate a few of them out of hand instantly because you’re not going to be buying individual stocks. (That’s my stock tip.) Instead, you’re going to be investing in mutual funds, because they are the simplest option, and offer the best return for the lowest risk.
This eliminates firms like Scottrade, which even though they offer an IRA product, really are just plain brokerages, which don’t discriminate between buying and selling stocks and buying and selling mutual funds. They charge you when you buy anything, which is not what we want. I’ll lump TD Ameritrade and ShareBuilder here as other firms to avoid when just starting out.
(Full disclosure: I have an old IRA from Scottrade, which I will be rolling over eventually, as I no longer believe it’s a good option for investment. Leaving it alone isn’t a bad plan, but I’m not contributing to it anymore.)
You want a firm that offers its own mutual fund products, and allows you to buy them without fees. After surveying the market, I believe that there are four firms under consideration are T. Rowe Price, Fidelity, Vanguard, and Charles Schwab.
Oh right, we were talking about minimums
But this isn’t a discussion of the firm to go with. We’re talking about minimum investments here. Why am I bothering with an analysis of different companies?
Easy: because different firms have different minimum required investments.
For example, Fidelity offers a quality IRA product. And they claim that it costs nothing to open an account with them. While that’s technically true, it’s not the whole story, because the products they offer (such as their S&P 500 tracker) require that you have a minimum of $2,500 to invest. (Thumbs down on Fidelity for not making this information easier to find.)
So the bar is set at $2,500. Can we do better?
Indeed we can. T. Rowe Price allows you to invest in its offerings through an IRA for only $1,000. According an online source, they charge a $20 monthly fee if your balance is below $10,000. I was not able to independently confirm this though,
I was, however able to confirm that Vanguard also has a $1,000 minimum for its required minimum investments, and if you sign up for electronic statements, it is a totally fee free account, and with low expense ratios to boot. This would be my choice.
(Charles Schwab also has a $1,000 minimum, but I wasn’t able to satisfactorily determine if there were other fees associated with the account. I guess these firms want to make this a little tough to find out.)
So the result: the minimum you need to start investing for retirement is $1,000.
Not all funds are eligible though
Now, not all funds are available at the $1,000 tier. The Vanguard 500 Index Fund and Vanguard Total Stock Market Index Fund, two of my favorites, require $3,000 minimum. But the following funds are fair game at the $1,000 level (at the time of writing):
When your balance reaches $3,000 later on, you can switch to another fund.
So there you go. When you’re ready to invest, start saving up $1,000 (a simple savings account will do) and then get in the game.
But enough about me. How did you start your investing?