How to Invest in Bonds with Little Money: A Beginner's Guide

Investing in bonds can be an excellent way to diversify your portfolio, earn reliable income, and manage risk. But if you’re starting with a small amount of money, you may wonder if bond investing is accessible to you. The answer is yes! With the right approach, anyone can invest in bonds, even with limited funds. This guide will walk you through the fundamentals of bonds, explain why they’re a good investment, and provide actionable steps for investing with a small budget.

What Are Bonds and Why Invest in Them?

Bonds are essentially loans that you, the investor, provide to an entity—usually a corporation or government. When you buy a bond, you’re lending money to the issuer in exchange for regular interest payments and the return of your initial investment (the principal) at the end of the bond’s term, known as its maturity date.

There are several reasons why bonds are a solid investment choice, especially for beginner investors:

Steady Income: Bonds provide fixed interest payments, offering a predictable income stream.
Lower Risk: Bonds are generally less volatile than stocks, making them a safer investment.
Portfolio Diversification: Adding bonds to your portfolio can balance risk, particularly during market downturns.

If you’re ready to get started with bond investing but only have a small amount to invest, there are still several accessible and affordable ways to do so.

Step 1: Understand Different Types of Bonds

Knowing the types of bonds available can help you make more informed investment decisions.

Government Bonds: Issued by national governments, these bonds are often seen as very safe. In the U.S., Treasury bonds (T-bonds), Treasury notes (T-notes), and Treasury bills (T-bills) are common examples.
Municipal Bonds: Issued by local governments or municipalities, these are often tax-exempt, meaning you won’t pay federal (and sometimes state) taxes on the interest income. Municipal bonds can be a good option if you want tax-free income.
Corporate Bonds: Issued by corporations, these tend to offer higher yields than government bonds, but with higher risk. Corporate bonds are classified into investment-grade and high-yield (or “junk”) bonds based on their creditworthiness.
Savings Bonds: These are low-cost bonds issued by the U.S. government, popular among individual investors due to their accessibility and tax advantages.
Bond Funds: A bond fund is a type of mutual fund or exchange-traded fund (ETF) that invests in a diversified pool of bonds. Bond funds allow small investors to own a diversified set of bonds with little money.

Step 2: Consider Bond Funds and ETFs

If you’re working with limited funds, bond mutual funds or bond ETFs are among the best options. These funds pool money from many investors to buy a diversified portfolio of bonds. Here’s why they’re a good fit for small investors:

Low Minimum Investment: Many bond funds and ETFs have low minimum requirements. Some online brokers even let you buy fractional shares of ETFs, allowing you to start with as little as $5 or $10.
Diversification: Bond funds and ETFs hold a variety of bonds, which reduces the risk that comes with investing in a single bond.
Liquidity: ETFs trade on stock exchanges, so they’re easy to buy and sell during market hours.

Example Bond Funds for Small Investors:

Vanguard Total Bond Market ETF (BND): This popular ETF provides exposure to a broad range of U.S. investment-grade bonds.
iShares Core U.S. Aggregate Bond ETF (AGG): Another widely-held bond ETF that includes U.S. government, corporate, and mortgage-backed bonds.

Step 3: Explore Online Brokerage Accounts with No Minimums

Finding the right brokerage account is crucial for bond investing with limited funds. Many online brokers have no minimum deposit requirement, making it easier to start investing with small amounts. Some of these brokers offer fractional shares for bond ETFs, allowing you to buy a portion of a share rather than a whole share.

Some brokerages with low or no minimums include:

Fidelity: Fidelity offers a range of bond mutual funds and ETFs with no minimums for some funds.
Charles Schwab: Schwab has a selection of bond ETFs with no minimum and a low-cost trading platform.
Robinhood: Known for commission-free trading, Robinhood offers a few bond ETFs and fractional shares, ideal for small investors.

When choosing a brokerage, consider factors such as fees, trading platform ease of use, and customer support.

Step 4: Use Fractional Shares for Bond ETFs

Fractional shares are a game-changer for small investors, as they let you buy less than a full share of an ETF. If a bond ETF costs $100 per share, you can invest just $10 or $20 by buying a fraction of that share. This means you can start building a diversified bond portfolio even if you don’t have hundreds or thousands to invest.

Many brokers, like Fidelity and Schwab, offer fractional shares, so check if your preferred platform supports them.

Step 5: Consider Automated Investing Through Robo-Advisors

Robo-advisors are automated platforms that build and manage a diversified portfolio for you, often based on your risk tolerance and investment goals. Most robo-advisors include bond ETFs in their portfolios, giving you exposure to bonds without needing to select individual investments.

Popular Robo-Advisors for Bond Investing:

Betterment: Offers a diversified portfolio that includes bond ETFs. You can start with a small amount, and Betterment rebalances your portfolio automatically.
Wealthfront: Wealthfront includes bond ETFs in its portfolios and has a low minimum investment of $500.
SoFi Invest: SoFi offers a range of investment options, including robo-advising, with no minimum balance requirement.

Robo-advisors usually charge a small annual fee (typically 0.25% to 0.5%), but this fee may be worth it for the convenience and automatic portfolio management they provide.

Step 6: Invest in U.S. Savings Bonds

If you’re looking for a secure way to invest a small amount in bonds, U.S. savings bonds are an attractive option. These bonds are backed by the government and are accessible to small investors through the TreasuryDirect website.

Series I Savings Bonds: These bonds offer an interest rate tied to inflation, which can protect your investment from losing purchasing power over time. You can purchase Series I Bonds for as little as $25.
Series EE Savings Bonds: These bonds have a fixed interest rate and are guaranteed to double in value if held for 20 years.

Savings bonds can be an excellent choice for long-term investors looking to invest small amounts safely.

Step 7: Build a Laddered Bond Portfolio Over Time

A bond ladder involves purchasing bonds with different maturity dates. As each bond matures, you can reinvest the principal in a new bond. This strategy helps to provide regular income and reduces the risk associated with interest rate changes.

If you’re investing a small amount, consider building a bond ladder gradually over time by buying bond ETFs with different maturity focus, such as short-term, medium-term, and long-term bond funds.

Step 8: Reinvest Bond Interest Payments

To maximize growth, reinvest the interest payments you earn from your bonds or bond funds. Most brokers offer automatic reinvestment of dividends and interest, which can help your investments compound over time. This approach allows you to grow your bond investment steadily, even if you start with a small amount.

Step 9: Track Your Investments and Rebalance Periodically

As with any investment, it’s essential to monitor your bond investments and adjust as needed. Regularly check the performance of your bonds or bond funds, especially if interest rates change significantly. Many robo-advisors and online brokerage accounts offer tools to help you track and rebalance your portfolio.

Rebalancing helps ensure your portfolio aligns with your original goals and risk tolerance. For example, if interest rates drop, you might want to consider adding more bonds or bond ETFs with higher yields.

Final Tips for Investing in Bonds with Little Money

Investing in bonds doesn’t require a massive upfront commitment. With options like bond ETFs, fractional shares, and robo-advisors, you can start with as little as $5 or $10. Remember these key takeaways to make the most of your small bond investments:

Start Small and Stay Consistent: Even small investments add up over time. Regular contributions, no matter how small, will help your investment grow.
Use Low-Cost Options: Minimize fees and costs by choosing low-cost bond ETFs, commission-free brokers, or affordable robo-advisors.
Be Patient: Bonds are typically a long-term investment. Be patient and allow your bond investments to grow steadily over time.

Conclusion

Investing in bonds with little money is entirely possible with today’s accessible investment platforms. Bond ETFs, fractional shares, robo-advisors, and U.S. savings bonds make it easier than ever to diversify your portfolio, earn passive income, and protect your investment from market volatility. By following these steps and staying consistent, you can build a reliable bond portfolio, even on a small budget.