A lot of investment advice seems to be geared toward people who make a lot of money, which can be intimidating if youre trying to invest on a budget. For example, a common bit of advice is to max out your 401(k) as a retirement investment, but the maximum contribution to a 401(k) in 2017 is $18,000, which might be a lot to put away if youre on a budget. Another common suggestion for the low-budget investor is to buy mutual funds, but many require minimum investments of $2,500.
Dont despair: Today, between technological advances and the rise of financial industry competitors, theres never been a better time to be an investor on a budget. From investment apps to online robo-advisors, theres a wide range of entry points. If youre confused about what to do first, here are tips to help you get started on your investment journey.
PAY OFF HIGH-INTEREST CREDIT CARDS
Before you begin investing, youve got to plug the financial leaks in your life. If youre spending more than you earn and adding debt to high-interest credit cards, youre going to run into financial trouble. Some credit card interest rates top 20 percent, which is higher than any return rate you can expect to consistently earn in the investment world. If you put money in a savings account or other investment and keep that credit card balance, youll likely be paying out much more than youre earning.
Any investment which in this case means payment you make on a credit card with a 20 percent interest rate essentially earns you a 20 percent return. For instance, a $100 credit card balance would turn into $120 by the end of the year, assuming you made no additional payments. If you put that $100 you have slated for an investment toward this debt instead, youll make $20 by the end of the year.
High earners are often quite frugal. A number of upper-income individuals understand that living below your means is one of the best ways to increase wealth. Nothing drains a wallet faster than eating out, subscribing to things you dont need or regularly buying fancy coffee at your favorite chain yet many people on a budget barely notice what theyre spending.
If you drink two $5 coffees each weekday and eat four $15 lunches a week, youre spending $2,500 on coffee and $3,000 on restaurant lunches every year. Although its hard to shut down all extravagances, view those coffee and lunch trips as special treats instead of everyday needs. Cutting down your coffees to one per day and your lunches to two per week for a year would put $2,750 in your pocket that you could invest.
BUILD AN EMERGENCY FUND
Building an emergency fund is an important first step of any investment program. Investing for long-term goals is great, but it wont do you much good if you have to use that money to pay for unexpected expenses.
Americans dont typically have emergency savings. In fact, 69 percent have less than $1,000 in savings and 34 percent have nothing at all, according to a recent GOBankingRates study. You can start your emergency fund by automatically depositing a portion of your paycheck into a savings account or even a Roth IRA just make sure the account is completely separate from the one you use for everyday expenses so youll be less tempted to use it.
This strategy will grow your savings account beyond the recommended emergency cushion of three to six months of expenses, and then you can look toward investing your future savings. You dont want to keep all of your money in an emergency fund because savings accounts typically pay low interest rates.
USE YOUR 401(k) MATCH
Although you might not earn enough to put away the maximum contribution each year, a 401(k) is a perfect investment vehicle if youre on a budget because you can usually invest a very small amount. Additionally, your 401(k) contribution is taken out of your paycheck automatically, which makes saving simple.
Many employers will match at least a portion of what you contribute to your 401(k), which basically provides you with free money. Twenty-five percent of employees dont contribute enough to their plans to benefit from the full employer match, and that number jumps to 42 percent with lower-income participants, according to Financial Engines.
Many companies offer a one-for-two match, which means youre earning a 50 percent return on your contributions from the start. You should definitely take advantage of this benefit.