How much money do I need to start investing?

The three gates that come before the number

Whenever somebody asks for a starting amount, they are usually asking the wrong question first. The amount is easy. The order is what matters.

1. A cushion you can reach quickly. Invested money can be worth less on the day you need it. Cash cannot. Before anything goes into the market, you want enough set aside to absorb a real interruption without selling at the worst possible moment. That is the whole job of an emergency fund.
2. No expensive debt. A balance charging you 18 percent a year is a guaranteed loss running against an uncertain gain. Paying it down is the closest thing to a risk free return that exists, and it beats any realistic expectation from an investment account.
3. An amount that survives its own costs. If an account charges a flat fee per purchase, a small contribution can lose several percent before it has done anything. Percentage based costs scale down with you. Flat costs do not.

Get through those three and the starting amount becomes almost a detail. Skip them and no starting amount is large enough to make the plan work.

What a small first amount actually buys you

People assume a small contribution is pointless because the growth on it is small. In year one that is true. What the small amount is really buying is not growth, it is information and habit.

• You find out how the account works while nothing meaningful is at stake.
• You find out how you personally react to seeing a balance fall, which is the only honest measure of your risk tolerance.
• You establish the monthly transfer, which is the part that has to survive for decades.

And the arithmetic on small amounts is less bleak than it sounds. Twenty five a month, kept up for thirty years at a steady 6 percent a year, reaches roughly 25,110 on 9,000 paid in. The percentage outcome is exactly the same as it would be for someone contributing ten times more. The full working is here.

Where the idea of needing thousands comes from

It is not invented. It is simply out of date, and it comes from three different places that have been quietly merged into one rule of thumb.

Older funds genuinely did impose entry minimums running into the thousands, and some still do. Financial advisers often set a threshold below which taking a client on does not pay for their time, which is a fact about their business, not about your money. And property, which is what many people picture when they hear the word investing, really does need a large deposit.

None of those three describe opening an ordinary investment account today and buying a broad fund with a modest monthly transfer. That is the version this site is written about.

The words you will meet

Minimum investment

The smallest amount a particular fund or account will accept. It varies enormously by product and is often zero on straightforward accounts.

Fractional share

A slice of a single share or fund unit. Where offered, it means the price of one unit no longer sets your minimum, so a 20 contribution can be fully invested rather than sitting in cash.

Expense ratio

The annual cost of holding a fund, charged as a percentage of what you hold. Because it is a percentage it scales with you, and because it is charged every year it compounds against you. See index funds and mutual funds, side by side.

General education, written for a reader starting from nothing. It does not know your income, your debts or the rules where you live, and it is not a recommendation to open any particular account or buy any particular fund.