Like most people, I find it easier to spend money than to save it. Pulling out a charge card is so convenient; filling out a deposit slip and a check just seems too difficult. If you know you need to get a savings plan going, and at the same time you doubt your willpower, one answer would be an automatic investment plan. With one of these plans, you set up an automatic withdrawal from your checking account. The money is invested in a mutual fund as you go. A side benefit to automatic investment is that you are also automatically using dollar cost averaging, a popular risk-reduction strategy.
Most fund management companies make their money by imposing fees based on a percentage of the net value of each account. Small accounts may be less profitable for the management company, since some costs (printing and mailing account statements and a fund prospectus, for example) are the same regardless of the size of the account. For this reason, many fund management companies have rather high initial investment requirement ($3,000 for most Vanguard funds and $2,500 for most Fidelity funds, for example). Some also impose a fee for accounts that fall below a certain level.
The initial investment requirement is often waived for accounts with automatic investment plans in place. Without too much digging, I was able to find two no-load fund families that permit you to open new accounts with as little as $50 per month automatic investment: TIAA-CREF and T. Rowe Price. (Full disclosure: I or a member of my family hold shares in T. Rowe Price Small-Cap Value and Equity Index 500.) Both feature low expenses, so you get to keep more of your investment.
There are a couple of other things to bear in mind. First, IRA accounts usually carry lower initial or automatic investment minimums, so you can pretty much take your pick from a wider number of funds. Second, there are expenses such as account maintenance fees that do not figure into the expense ratio, since they are imposed on a per-account basis.
For more ideas, here is a screener for mutual funds by the Mutual Fund Education Alliance. You can search by Morningstar ratings, initial investment requirements, asset class, and expenses. For a guide to fund expenses and why I place so much emphasis on them try this article in The Motley Fool. For general information on mutual funds, here is the Wikipedia article, originally written by yours truly.
3 thoughts on “Starting Small”
While I don’t follow #1 that well:
1. Always pay yourself first;
2. Thou shalt not touch thy principal.
Back in the day, before it became wholly-owned subsidiary of New York, there was a series of jokes about Vermonters. According to one, a flatlander came to town and noticed the behavior of the townfolk toward one of their number. Whenever this fellow came down the street, men crossed to the opposite side. Ladies affected not to notice his greeting, and rude boys made faces behind him. “Closed” signs appeared in shop windows. Even the dogs growled. Finally, the out-of-towner asked what had excited the general contempt.
“Is he a criminal?”
“No, he ain’t.”
“A seducer, or a philanderer?”
“Nope, not hardly, though his wife is as plain as the back of a toolshed; but he ain’t going to win a prize at the fair neither.”
“So is he an embezzler then?”
“Mmm, no, not really.”
“OK, then, what did he do?”
“Dipped into his principal.”
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