In this article, we will take a look into why p2p lending is the ideal asset class you can start investing with little money.
Low Barrier Of Entry
Most p2p lending platforms have very low minimum investment thresholds. Most platforms, like Mintos for example, has a 10Eur minimum investment. Crowdestor’s minimum investment is 50Eur, and Envestio’s, Kuetzal, and a few others is 100Eur.
As you can understand, you can start investing with as little as 10Eur and make additional monthly contributions and keep investing them along with interest earned from the previous investments. Long term, you will be able to take advantage of the compounding effect to the fullest.
Most p2p lending platforms charge no fees for investors. That is something essential to investors with both small and large portfolios. This is because high fees eat into returns and long term that could be thousands even tens of thousands.
Of course, this is more important to people with small portfolios. Let’s take a look at a hypothetical scenario: You have 50Eur to invest. You open a brokerage account to buy stocks in a stockbroker like DeGiro. This is the broker I personally use because it has the lowest fees in Europe. You will have to pay a commission fee for that trade. Now DeGiro is the cheapest broker, but you would still pay 1Eur to buy that stock. Maybe even more, depending on the exchange that the stock that you will be buying is trading at. That is a large percentage of your money, and this is exactly what you have to avoid when investing.
When investing in p2p lending, you can open an account for free. Then, you can just fund your account for free, start buying loans for free and of course, withdraw for free if this is something you want to do. Also, there is no management fee involved when investing in p2p lending.
When you invest in stocks, you have to research the company and keep track of its performance. What I mean by that: Public companies (companies that trade in the stock markets) report their financials one per quarter. What that means for you, as a shareholder, is that you will need to read these reports to track the companies performance. Now, you need to ask yourself, does it worth your time to put into research and reading the report if you only have a small amount of money? For me, that was a big no. I started investing in stocks only after I had a large enough capital not only for this but for diversification that we will get into later in this article.
Most p2p lending platforms offer an auto-invest function. What that means is that you can set some specific parameters and let the auto-invest function invest for you. What you have to do is to only make deposits into your investment account and nothing more. You can now focus on how to increase your income in order to have more money to invest in other ways or grow your p2p lending portfolio.
With p2p lending, you can buy small loan fragments starting at 10Eur. With Mintos, it can be even less on their secondary market. Think about this for a second. There are thousands of loans you can buy or let the auto-invest buy for you that can diversify your investments. It takes no time and again, it is entirely passive.
With the stock market, you can do the same thing, but each time/month you buy shares of a company, you continue to pay fees. Not only that, but you have to track the companies you are invested in continuously. That can be good because it will give you valuable knowledge of what you should do when your portfolio grows without having a lot of money on the line. But at this point, I believe it is better to spend as little time as possible tracking your investments and more time trying to increase your income.
I am sure that you have heard of the compounding effect when you are searching about investments. If you have not, in sort, it means that your returns generate their own returns. For example, if you invest 10,000 in p2p lending at 12% annually, at the end of the month, you will have 100 extra or 1% of your capital. If you invest that money into other loans with the same interest and keep doing that every month at the end of the year you will have 1,268 instead of 1,200. That is because every month that you received the interest, you reinvested it and that interest generated interest on its own.
That compounding effect applies to all investments. But in my opinion, this is more profound and more noticeable with p2p lending because you receive interest on a monthly basis. This is because if you compare it with dividend-paying stocks that pay dividends quarterly like most of them do, you can’t really do anything with that money because it is too little. You just leave them in your brokerage account as cash collecting dust instead of interest.
Paying Off Dept First
Before you start investing it is important to pay off your exiting debts first. Especially if the rate is over 4-5%. That way you have no risk of loosing the money that would be used to pay off your credit cards and loans and the return of your investment is guaranteed since you wont have to pay the interest any more. You can read more on our article: Tips For Getting Out of Debt.
How To Start Investing With Little Money – Conclusion
For all of the reasons mentioned in this article, I believe that p2p lending is the best way to start investing with little money. You can start off by reading the article of the best p2p lending platforms in Europe and my personal favorite, the Mintos review. Another great idea for pleople on a tight budget that need liquidity is Bondora Go&Grow. That is the only Bondora’s product I recommend and they pay you a fixed 6.75% annually with instant liquidity. That means that you can deposit and withdraw funds as you please without any wait times like a high-yield savings account. It carries minimal risk for the return you are getting and I definitely recommend it. A good thing about p2p lending is that many platforms offer cashback bonuses when you invest that can significantly increase your returns especially in the beginning with a small capital invested. You can see all available offers in this page.
You can also keep track of my progress by checking my monthly income reports that I outline my income from p2p lending platforms.