Start on your first $1,000,000 with just $200?! You can make it happen for you. If you’ve managed to accumulate just $200 to invest, you’ve taken a step that many Americans have failed to take: Saving! In just three easy steps,You can turn that $200 into more money than you can dream of. All it takes is a little dedication on your part and the willingness to learn. Ready? Let’s go!
Step 1: Saving. Starting with $200 means you’re already ahead of the game. If you’re thinking about investing, you’re already savvy enough to know that the amount of interest you can earn in the short term on $200 is not enough to make you rich over your lifetime. That means that while your $200 is a good start, what’s really going to make this plan work in the long term is learning how to put a set percentage of what you earn to work for you. That doesn’t mean you have to eat Top Ramen every night for the next 20 years. What it does mean is that you will need to set some realistic short and long-term goals regarding your savings. Right now, any amount you can afford to set aside each paycheck will help. Start with $25 or $50 a paycheck for the first year and you’ll be amazed at how much you accumulate. Maybe the figures aren’t as impressive as you would like, but you’ll find that the more you stick to your savings and investment plan, the more you’ll start to like.
Another important point about savings has to do with installment debt. Your credit card debt really works against you when you are trying to accumulate wealth. Imagine you invest your $200 at a 12 percent annual return. In one year, you will have about $224. Now imagine you borrow that same $200 at 12 percent on a credit card. In a year you will have paid out $224. What’s more, many credit cards charge rates of 18 to 20 percent or more. Borrowing that same $200 at 20 percent will cost you $240. Factor an annual fee of $75 and you’re shelling out $315 for the same $200. It’s not hard to see that any high interest debt really costs you more than you can make. Without any accumulated savings, it’s hard to pay for emergency expenses like unexpected vet bills, or when the fridge goes on the fritz. Clearly, a solid savings plan will earn you money in the long run.
Step 2: Investment. There really is no “one-size-fits-all” approach to investment. Further, there is no such thing as wealth without risk. What this means is that the more risk you can handle taking on, typically the greater the potential for profit, but also the greater the potential for loss. The best investment plan is the one that features the greatest rate of return with a tolerable amount of risk. For the average american investing $200 to start out with, I would recommend steering clear of high risk investments like futures trading. In fact, no reputable broker will allow you to open a futures account with only $200. For that matter, I would steer clear of buying anything on margin until you have a substantial amount of money to invest ($10,000 or more).
Having said that, you’re not going to make any money by playing it safe all the time. You’re going to have to take on some risk. It’s up to you to decide how much risk you can comfortably assume. The best advice I can give is not to invest money that you need. That is, don’t throw $200 into the stock market if you can’t afford to lose it because you need that money to pay the rent. Assuming, however, that this $200 is extra, the most bang for your buck at this level will come from stocks, guaranteed. I recommend online trading, and Wells Fargo Sharebuilder is about the best game in town for your money (http://www.sharebuilder.com/wellsfargo). For one thing, the $4 per trade commission is significantly less than any other online broker, including E-trade and Ameritrade. Another big advantage is that they allow you to open an account with as much or as little funding as you have available. There are no account minimums. For the small time trader, this is clearly a great option. The $4 charge covers as many shares as you want to buy at one time. Additional purchases of the same stock at a later date are charged another $4 commission, so it really is best to buy at least $200 worth of a stock at a time.
Now that you’ve opened your account, the next thing you’ll want to think about is which shares to buy. Right now, technology stocks such as Microsoft (MSFT), Intel (INTC), Dell (DELL), and Ebay (EBAY) are all great stocks to consider. The best way to find a stock that will offer a good rate of return with low risk is to find stocks that are undervalued. This means that you should select a stock that is very near at a least a one year low in price. It’s also best when you’re just starting out to stick to stocks that are at or below $25 a share so your money goes a little further. Once you’ve purchased that stock, hang onto it until you’ve made about $7 to $10 per share. Then sell it once it reaches your target level and move onto the next stock, and the next, and so on…
Let’s say you found a great buy at $20 a share. After your $4 commission, you’ve got 9.8 shares (partial shares are sold). In addition, you’re saving just $25 a paycheck, which equates to $50 a month. After you accumulate another $200, you buy more shares. Let’s say that in three months, your 9.8 shares go up $5 per share to $25. Then, after four months, you buy $200 more worth of shares at $25 per share. You now control 17.6 shares total (subtracting out the commission and buying $196 at $25 each). Then, after another two months, let’s say the price goes to your target value of $30 per share at which point you sell. How much did your $200 and the money from your savings plan total? Well, there’s the $392 you invested plus the earnings on that, totalling $137. Then there’s the $100 you have from two more months of your savings plan. That’s a grand total of $629 in just six months. Counting only the $137 in pure profit, though, you’ve earned 34.25 percent on your money in just six months. Fantasy? I played out this exact same scenario (with a little more money at both purchases) in my investment in General Motors (GM) this year and nearly doubled my money. This sort of scenario can happen every day. What’s more, even if your stock is a bit sluggish to move at first, dividends give you a little profit along the way, and remember, your savings is most important. You are accumulating money you would not otherwise have, and you’re taking out so little each paycheck that you never miss it!
Step 3: Use compound interest in your favor. Sticking to this plan is what will earn you big money in the long run. Let’s face it. $600 is not enough to retire on. But let’s say you roll that $629 into the next stock. You buy $629 of the next stock at $20 a share. This means that up front, you control 31.4 shares while continuing your savings plan. In four months, your stock is up to $25 a share again and you’ve got another $200 to spend on shares at this price. You buy another 7.84 shares, and when you cash out, you have a total of $1,177 and another $100 saved up for a total of $1277 in just one year. I’ll let you do the math and carry this out for the next couple of years. Compare this with what you would earn in a typical savings account, most of which are paying less than 1% these days. If you started with $200 and saved $600 over a year’s time, you would have a little over $800 after a year. You’ve earned over 30 percent in the stock market, and had fun doing it too!
Rather than pay out your hard earned money to credit card companies, why not put your money to work for you? With as little as $200 to start with (or less!) you can be well on your way to financial freedom in no time. You don’t even have to take on high risk investments to do it.