By Beth Pinsker
NEW YORK (Reuters) - My preteen daughter earned her first dollars in 2018, so I wanted to seed her retirement account. But what can you do with $100 or so?
For people just starting to invest, those first steps are always the hardest. Most financial institutions do not even want you. Choose wrong, and your whole balance can be eaten up in fees.
On the other hand, if you get it even a little bit right, you could enjoy the magic of compounding interest.
Dennis Nolte, a certified financial planner in Winter Park, Florida, had one of his career highlights when a couple came to thank him for his help setting up a savings plan from zero.
Nolte worked at Disney's credit union when the couple came to see him. They were in their twenties, not yet married and struggling to make ends meet. They did not have $2,500 to meet the money market minimum, so Nolte set them up with a savings plan of $20 per pay period. If they got raises or bonuses, they promised to increase the amount.
"Four years later, during the market meltdown when everyone's hair was one fire, this young woman walks in and says she's there to put a $5,000 down payment on their house," Nolte said. "It was like water in a desert."
Here are some tips for small-fry investors:
* Child earnings
Financial advisers love Roth IRAs, retirement accounts that take after-tax contributions, because the growth is tax-free. But you need earned income to contribute. The maximum contribution is $6,000 in 2019.
Some custodians, like Fidelity, offer accounts for minors under age 18 with no minimum balance and no annual fees. You pay $4.95 for trades unless you pick from a special selection of mutual funds and exchange traded funds.
With a small investment, do not worry about diversification, said certified financial planner James White, of Pottstown, Pennsylvania. And do not worry about market volatility, because the time horizon is so long, White added.
Pick a solid index fund like the Vanguard 500 or Schwab Total Stock Market Index and do not overthink it.
My daughter's initial $115 could be worth more than $1,000 by the time she is 59 if it grows at a reasonable 5 percent. If she contributes more over time as her earnings grow, she could be well set by her 30s, and she could take out the principal for a down payment on a house.
* College savings
The longer the time horizon, the better you will do. That is the chief incentive for starting early and small with college savings, even just $25.
Most financial advisers recommend 529 savings plans for this purpose, which give you a tax deduction in many states and grow tax-free.
Target-date funds that balance stocks and bonds for you over time are a good choice for this purpose, Nolte said. Pick an end date when your child will be in college and roll forward until it is time to pay tuition, adding as much as you can over time.
* General savings
If you are looking for safety, keep your savings in a high-yield savings account or certificates of deposit that are FDIC-insured. You can find the highest rates at a site like bankrate.com, but read the fine print, because some have minimum balances or require regular contributions.
If you have money for investing, open a brokerage account at any number of financial institutions and start buying stocks and bonds. Some, like Charles Schwab (NYSE:SCHW) and TD Ameritrade, have no minimums. An app like Acorns can help you put aside spare change and put it to work in investments, for a monthly fee of $1 to $3.
Wealthfront.com is among those that have a $500 minimum. Spokeswoman Kate Wauck said the company wants to make sure that investors have a demonstrated ability to save and are ready to invest.
Nolte said he started his teen daughter's brokerage account with $1,000. He bought individual stocks that meant something to her, like Target (NYSE:TGT), before shifting to broad index funds.
Note: These accounts will affect financial aid if any of your children are soon applying to college, especially assets in a child's own name. You will also have to pay tax on the child's dividend income above $1,050.