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Low cost entry fee into mutual funds

Question: I have credit card debt which causes me a great deal of stress. I'm slowly paying it off. I have a 401k and a savings account. I have a financial question that I've always wanted to ask an expert. While I'm paying off my debt, I would LOVE to also be contributing to a "financial portfolio" that would be a mix of: savings, 401k, index funds, stock-only mutual funds, IRA, money markets, etc.

All I needed to start the savings account was $25. Great. To start some of these other financial products you need a minimum amount (hundreds or thousands of dollars). I've never been able to scrap together enough to start some of these things. It is very frustrating. Other than moving money from my savings account, is there a way to start-up/establish beachheads on some of these products (i.e. index funds). As in ... $100? I want to have a dog in many of the financial races (long-term) but I can't even afford the dogs. Thank you, Jeff

Answer: I'm going to get to the specifics of your question first and then make a general comment about your financial situation. First of all, you're absolutely right. Many mutual funds require somewhere between $1,000 and $3,000 for an initial purchase.

However, there are several ways to find good low cost options. Morningstar.com, the investing database, offers a simple and useful mutual fund screener for finding funds with a $500 or less initial buy. You can click on a couple of parameters. I limited the search to no-load mutual funds with an initial buy of $500 or less, an expense ratio of 1.00% or less, and only funds in its two highest ratings categories. The screen came up with a menu of mutual funds to investigate further.

Another trick for getting in on a good fund on the cheap is to join its automatic investment program. Many mutual funds will waive their initial minimums and substitute a much lower figure, say $50 to $100, if you commit to a regular monthly investment schedule. The monthly automatic commitment from your checking account into the fund lasts until you've reached the minimum balance. Again, ask if the fund company offers such a plan if your interested in one of its choices.

Finally, almost all mutual funds offer lower minimums for their IRA accounts. Of course, the price is that your money is tied up in a tax-sheltered retirement account.

That said, I think the strategy you're pursuing right now is pretty good. You are attacking the credit card debt. You're adding to your savings. And you should own a well-diversified portfolio in your 401(k). I would suggest that those three financial steps will do you well over time and you can always set up mutual fund accounts later on when your finances are more stable than now.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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