How much money do you need to start investing?

Some would-be investors think you have to be rich to invest in the stock market. But that's not exactly true.

It really doesn't take a lot of money to begin to invest and save for retirement. That misconception causes a lot of people to delay or avoid investing altogether.

The minimum to start investing

While it's true that some investment options require more cash than others, you might be surprised to learn just how low it can be. All it takes is a little extra money that's not needed for a while, a plan and some patience.

Account minimums and minimum investments

It might be confusing to hear a company say that investors can open an account with $0. Remember, it does take actual money to invest. The account minimum is the minimum amount of money you need to keep an account going. It's different from investing minimums, which can change based on the investment choice.

For example, one company might allow an investor access to their own mutual funds for just $100. But it might take $5,000 to invest in their robo advisor.

Another company might have a minimum of $1,000 to open a target retirement fund but require a $3,000 investment for a different mutual fund.

These examples show that some investment options require more cash than others. This doesn't mean that one is better than the other; they're simply different. You shouldn't feel like you can't save for retirement just because you don't have $5,000.

The better takeaway: Commit to saving for retirement and choose a budget-friendly investment option. Remember, starting small is better than not starting at all.

Simple ways to invest for retirement

Many people invest through an employer-sponsored retirement plan like a 401(k), 403(b) or Thrift Savings Plan (TSP) (Opens in a New Window)‍ ‍ ^{See note 1} Employers usually make it simple to sign up and to contribute a percentage of each paycheck. Some will even match what you put in up to a certain percentage. This is a good option for beginning investors because you don't need a high cash balance — or any cash at all — to get started. Each person simply needs to carve out a portion of their paycheck for retirement savings.

If an employer offers a matching contribution, that's free money. Don't leave it on the table.

The Blended Retirement System (BRS), the military's retirement system, provides this match. BRS provides up to a 5% match on contributions out of basic pay.

USAA believes in saving at least 10% of pre-tax income toward retirement. Some people get discouraged when they're not able to save as much as they want right away. That can prevent them from starting. But it's always better to start saving for retirement early. One or 2% is a start, and then gradually increase contributions until they reach their required contribution amount to reach retirement goals.

A good time to start investing, even if it's small

When you start saving or investing as early as you can, you have time on your side — one thing you'll never get back. Time plays a big part in reaching your long-term goals. It also factors into compounding earnings.

Your compounding earnings include the amount earned on the original investment as well as the amount earned on those earnings.

Let's look at this quick example. Let's say Sally begins investing for her retirement at age 22, and she plans to retire at 65. That means she has 43 years to work toward her goal. Let's also assume that Sally invests $500 a month and earns a 6% rate of return.

Over the course of 43 years, Sally contributes $258,000, and her final account value tops $1.1 million. From this, we learn two valuable lessons.

Lesson 1: Time is critical in achieving goals.

In this example, 78% of the final account balance is made up of earnings. This occurs through compounding, and time is the critical piece.

Lesson 2: Stay committed.

Sally shows discipline by sticking to her savings strategy over time.

As you can see in the early years, most of the account balance is made up of Sally's own money. As the years go by and the earnings begin to compound, that percentage goes down dramatically. That only happens if you stick with the plan and give time an opportunity to work its magic.

The same logic applies even if Sally starts by investing just $100 per month instead of $500 per month.

Again, time and discipline are important even with smaller amounts invested. The takeaway? Don't let larger investing minimums keep you from getting started.

How to start investing on a strong financial foundation

You don't need a lot of cash before investing, but you do need to be on solid financial footing. That's important because there's always a risk of loss when investing. You don't want to lose money that's needed for everyday living.

Solid financial footing means:

• Spending less than you earn.
• Having money in emergency savings.
• Reducing debt to a manageable level.

Spend less than you earn.

Compare your income to your expenses. If you find that you keep shelling out more cash than you earn, then chances are good that you're regularly going into debt or drawing from your savings to cover day-to-day expenses.

It's nearly impossible to shore up your long-term savings if you're spending more than you earn. Unfortunately, sometimes breaking the cycle can feel like jumping off a fast-moving treadmill. How can you make the leap? It all starts with a budget.

Fund emergency savings first.

Before investing, it's wise to have enough emergency savings. If too much of your money is tied up in your investments, you risk having to abandon your plan and cash out your assets, which may have unanticipated costs.

Most people should aim to have about 3 to 6 months' worth of expenses in their emergency fund. This may seem like a lot, so have an initial goal of $1,000 and continue from there.

Read more on how to kick-start your emergency fund.

Reduce debt to a manageable level.

Once you've saved $1,000 in your emergency fund, prioritize paying down debt. To create a debt strategy, revisit your budget and fix any issues that may have caused you to spend more than you earn.

Some debt, especially credit card debt, can grow faster than the stock market. I recently received a credit card offer, and the stated interest rate was 26.99%. When you consider that the S&P 500 has had an annualized average return of around 10.15% since its inception in 1957, it really puts things into perspective. While past performance certainly doesn't guarantee future returns, 26.99% is a lot higher than 10.15%. Credit card debt can have a devastating impact on your finances.

Sometimes you can pay off debt faster by using a personal loan to consolidate debt. If this option helps you by lowering the interest rate that you're paying on the debt, it's worth exploring.

Next steps to start investing

If you still feel uncertain about what to do next, you can boost your confidence by brushing up on the basics of investing.

The good news is, with the multitude of options available, an alternative is never far away. The key, as with any goal, is to start early, when time is on your side.