How to Invest $50-$5,000

1. Tax Reform Simplifies Investing

In general, it slashes personal tax brackets and curtails a number of deductions and tax shelters, making it important to rethink your personal investment strategy.

Lower tax brackets. The 1986 Tax Reform Bill reduced the number of tax brackets, generally lowering them for most investors. This means a larger portion of investment income can be retained, making investing more attractive. The highest rate prior to reform was 50%, but starting in 1988, there were two basic rates for most taxpayers: 15% and 28%.

Capital gains taxed as ordinary income. The new law stipulated that all gains, whether long- or short-term, as well as any interest and dividends, are now taxed at the same rate as your salary. There is no longer a distinction between capital gains dividend or interest income. This means high-yielding stocks, such as utilities and corporate bonds, are more attractive.

Municipal bonds remain attractive. Municipal bonds, which are tax-free, are one of the few tax-advantaged investments left. This means those municipals which are “triple tax-exempt” (free from federal, state, and local taxes) should be considered if you live in a state with high taxes.

2. IRAs and Keoghs: Retirement Savings Powerhouses

With very few exceptions, every American should have an IRA, Keogh, or salary reduction plan, or, if possible, all three.

Tax-advantaged retirement accounts. IRAs (Individual Retirement Accounts) and Keogh Plans are tax-advantaged accounts designed to help individuals save for retirement. The money in both accumulates tax-free interest or dividends until retirement. These may sound like stodgy ways to save, but the tax breaks offered by each of these three plans make saving very worthwhile; and fairly flexible rules provide a wide array of investment vehicles.

Contribution limits and spousal accounts. Anyone who is working can put up to 100 percent of the first $2,000 he or she earns annually into an IRA every year. If both husband and wife are working, each can contribute $2,000 to separate accounts every year and take $4,000 off their joint income tax return. If one spouse does not work, then the working spouse can contribute up to $2,250.

Investment options within IRAs and Keoghs. Whether you’re inclined to be conservative or speculative, there’s an investment program that’s right for your retirement plan. The various choices are explained in this chapter. These include bank CDs, mutual funds, brokerage houses, insurance companies, and zero-coupon bonds.

3. Safe Havens for Your First $50

Yet for most of us, the local bank still seems the most logical holding spot for that first $50.

Passbook and statement savings accounts. When you deposit $50 in a savings account at a commercial bank or S&L association, the maximum you will receive is 5Vz percent—the top rate currently allowed by law. Credit unions pay as much as two to three percentage points higher.

Automatic savings plans. For those who spend every penny and always will, an automatic savings plan may be a solution. Similar to the bank coupon clubs (Christmas Clubs are a good example; we’ll come to those in a minute), they operate through your local bank.

Coupon clubs. It’s certainly gimmicky, but if it helps you save, then give the bank coupon club a try. The coupon club is the generic name for a myriad of programs devised by banks to attract business. These include Christmas clubs, Hanukkah clubs, vacation clubs, and so forth.

4. Credit Unions: A Cooperative Alternative

Credit unions are cooperatives, or not-for-profit associations of people who pool their savings and then lend money to one another.

Higher interest rates. Once thought of only as a place for assembly line workers to get a car loan, credit unions have taken on a brand new look. They are a viable choice for your $50, and they usually pay two to three percentage points above the top commercial savings rate, which is 5V2 percent. There is no lid on interest rates; they vary from union to union.

Common bond requirement. By law, they must have so-called “common bonds,” which may consist in working for the same employer, belonging to the same church, club, or government agency, or even living in the same neighborhood. Because they are not-for-profit and because overhead costs are low, credit unions almost always give savers and borrowers better rates and terms than commercial institutions.

Services offered. Today’s upbeat union bears very little resemblance to the cooperatives established some seventy-five years ago in order to save working-class people from the ubiquitous loan shark. These feisty cooperatives have aggressively expanded their turf, offering a line of sophisticated financial services and often competing very favorably with commercial banks and savings and loans. Many, in fact, operate like local banks.

5. Uncle Sam as Your Banker: U.S. Savings Bonds

When you buy a U.S. Savings Bond you are lending money to the U.S. Goverment.

Series EE Savings Bonds. Uncle Sam is willing and eager to keep it for you and, in return, provide a little something in the way of interest through what is known as a U.S. Savings Bond. Now the Series EE Savings Bonds are a viable way to save small amounts of money (known as preserving capital) and at the same time earn interest.

Purchase price and maturity. You can buy EE bonds at your bank in multiples of $25. The purchase price is actually 50 percent of the bond’s face value, so in other words, a $50 bond costs only $25* Series EE bonds mature in twelve years by federal law, so if you hold them until maturity you will double your money—that is, you’ll get back the face value, $50 per bond in the case of a $25 bond, plus variable interest.

Interest rates and redemption. These bonds pay 4.16 percent for the first six months and 4.27 percent for the first year. Then, the yield rises every six months up to five years. After that, you earn interest equal to 85 percent of the average yield on five-year Treasury Notes (see page 74). The government guarantees a minimum of 6 percent on all EEs held for five years.

6. Entering the Stock Market with $50: Mini-Investor Programs

Once you have tucked away a small nest egg, then $50, believe it or not, can move you into the stock market.

Buying stock directly. You can bypass stockbrokers altogether by going directly to the company. Only a handful of public companies offer this unique service, but you can expect more to join the bandwagon.

Dividend reinvestment plans (DRPs). Even if you only own one share in a company, sometimes you can participate in the dividend reinvestment plan (DRP) which permits shareholders to buy additional stock by automatically reinvesting dividends.

Sharebuilder Plan. An inexpensive and convenient way for you to invest in stocks has been devised by Merrill Lynch, the nation’s largest full-service brokerage firm. Through the Sharebuilder Plan, you can now invest any dollar amount you want, the minimum being $25.

7. Investment Clubs: Learning and Earning Together

Of all the options you have at your doorstep, a clubhouse will provide you with the most fun and enjoyment—if not the greatest return on your principal—as a home for your $50.

Pooling resources and knowledge. Joining an investment club is an excellent way to learn about the stock market, the movement of interest rates, and the overall economy. It is also a great way to meet new people who, like you, are interested in learning how to handle a small amount of money.

Club mechanics. Most clubs are small—optimum size is about twenty—and they meet once or twice a month in a community center or in a member’s home. Members pool their money and jointly purchase shares of stock. Clubs require monthly payments which can range from $20 per month to as high as the members dare go.

Starting your own club. If you don’t know of a club in your area, ask at work or at a local YMCA or YWCA, adult education center, church, or synagogue. If you cannot find a club to join, start your own with a few friends or colleagues.

8. NOW Accounts: Earning Interest on Checking

Basically, a NOW account is a handy housekeeping account that permits you to earn a little interest on your cash balance as you pay bills.

Interest-bearing checking accounts. NOW stands for Negotiable Order of Withdrawal, and basically a NOW account is an interest-bearing checking account. It’s like a regular checking account with printed checks and regular statements, but it also pays interest—514 percent generally.

Minimum balance requirements. In order to earn the 514 percent, a minimum or monthly average balance must be maintained. These minimums vary nationwide from about $300 to several thousand dollars.

Share drafts at credit unions. The equivalent of the NOW account at a credit union is called a share draft. Since credit unions do not have a cap on the amount of interest they can pay, share drafts generally offer slightly higher rates than bank NOW accounts.

9. Money Market Mutual Funds: High Yield and Liquidity

A money market mutual fund is really just a special kind of mutual fund—which, in turn, is an investment company.

Pooling money for higher returns. After you’ve established your IRA and opened a checking account, then saved $500, the next step is to find a safe place to put your hard-earned savings. One choice is a money market mutual fund where you can earn almost twice as much as in a regular savings account or a NOW checking account.

Investing in money market securities. Money market funds derive their name from the type of securities they invest in—“money market” securities. Financial companies, large corporations, and the U.S. Government all borrow large sums of money for short priods (one year or less) by issuing money market securities in exchange for cash.

Liquidity and check-writing privileges. A key point in favor of these funds is their liquidity. You have almost immediate access to your money without penalty. You can cash in your shares either by phone, by mail, or through your broker. Frequently, in fact, you can have money wired from the fund directly to your local bank. In most funds, you can also tap the money by writing checks against your shares.

10. Certificates of Deposit: Safety and Guaranteed Returns

If you are looking for safety and high yields, this is the place for you.

Time certificates sold by banks. Certificates of deposit, called CDs, are time certificates sold by banks. They are issued for a specified amount of money for a specified period. You agree to leave a certain amount of money with the bank, S&L, or credit union for a stated amount of time, ranging from a few months to several years.

Differences among bank CDs. Because all banks are now free to bid for your money, it is crucial that you investigate as many as possible when looking for a CD. Don’t assume they all have more or less the same rates, because it’s just not true. Minimums vary. Rates vary. Compounding interest varies. Maturities vary.

Buying CDs through a broker. As part of the trend toward one-stop financial shopping, you can buy a CD through a stockbroker. With a broker you will get FDIC insurance, and you escape those hefty early withdrawal penalties the banks impose.

11. Bonds: Investing for Income and Security

To safeguard your principal and at the same time guarantee long-term income, you can’t beat bonds as a sure $1,000 investment.

Bonds as IOUs. Simply stated, a bond (unlike a stock) is an IOU. When you purchase a bond you are, in effect, lending your money to the issuing company or government agency* Bonds come in three types: those issued by the U.S. Government and its agencies, those issued by corporations, and those issued by states and municipalities, known as tax-exempt or “muni’s.”

Price and yield relationship. Just like stock prices, bond prices fluctuate. Their market value changes every day (or several times a day) in reaction to the availability of our number-one commodity: money. As interest rates go up or down, bond prices change. The rule of thumb to keep in mind is: Bond prices move in exacdy the opposite direction from interest rates.

Municipal bonds and tax advantages. While tax reform has curtailed or wiped out most shelters, it has left muni’s as one of the few ways to earn tax-free income. Yet the reform did entail changes in muni’s you should know about.

12. Stock Mutual Funds: Diversification and Professional Management

For the small investor, the new investor, and the very busy investor, mutual funds offer diversity, professional management, liquidity, and relatively low cost.

Pooling money for stock investments. Buying shares in a mutual fund is often a good alternative to trying to pick from among the thousands of stocks available. When you buy into a mutual fund you are actually purchasing shares of an investment trust or corporation. Your dollars are pooled with those of hundreds of other investors, and these combined monies are then invested and managed by professionals in large, diversified purchases of stocks, bonds, and various money market papers.

Load vs. no-load funds. Before beginning your search for the right fund, you should know the difference between load and no-load funds. Load funds, sold by stockbrokers and mutual fund salesmen, are “loaded” with a sales charge or fee. Commissions for the purchase or sale of the fund generally range from about 4 percent to 8Vz percent of the total price. No-load funds have no sales commissions; you purchase shares directly from the fund itself, not through a stockbroker, and you pay only a small annual charge for administration and management.

Types of stock funds. Funds fall into several broad categories. Because of the boom in mutual funds over the past few years, you can select today from a broad range. There are funds that emphasize growth, others that focus on income. Some have tax-free holdings, others aim at capital appreciation or have speculative holdings.

Last updated: March 9, 2025