How to invest when you're on a low budget
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There’s an old saying you’ve probably heard that goes “it takes money to make money”. Not everyone has thousands of dollars laying around.
It can be tough for those living paycheck to paycheck to put aside money to invest in their futures when all you can think about is how you’re going to pay your next bill or put food on the table. If this is your reality, I can understand that investing may be very far down on your priority list, but it doesn’t have to be.
Today’s issue in The Profit Zone will help you gain the knowledge (and confidence) you need to start investing with very little money so you can dig yourself out of the dangerous cycle of living paycheck to paycheck.
Before we start, it’s important to lay out WHY investing is important.
You can earn “free” money. While some would argue that dividends aren’t free money, I’d argue the opposite. Dividends are money you earn for doing zero work. Many dividend stocks will also pay you more than your savings account would.
Building good financial habits early is key to financial success later on. Nobody ever talks about the intangible aspects of investing. The mindset shift you experience and the habits you build over time. All of that is just as important (and valuable) as the money you make in the market, if not more.
You lose purchasing power in the bank. As mentioned above, savings account rates are extremely low, sometimes as low as 0.05% APY. And with inflation at its current levels, you’re losing money every year you keep your money in the bank.
Your money has to work for you or you’ll work for money forever. Money can work longer hours than you can and it’s your job to take advantage of that.
With that being said…
Here’s How You Can Start Investing on a Low Budget
The worst thing you can say is “I’ll start investing when I have X amount of dollars”.
That’s like saying “I’ll start going to the gym when I lose 25 pounds”.
The idea that you have to be rich before you start investing is a MYTH. You don’t get rich THEN invest, you get rich BY investing.
See the difference?
Tip 1 - The Brick-by-Brick Approach
Was Rome built in a day? Of course not, it was built brick by brick. In fact, according to ancient historians, it took 1,229 years to build Rome in its entirety. But back to the point… Whatever your financial situation right now, you can probably free up an extra $5-10/week, at least.
Something in your life has to be eliminated and it doesn’t have to be something big.
I used to buy lunch at work almost every day. Now I make my lunch at home the night before. When it’s all set and done, I save about $5-7/day on food from this one slight change. The lifestyle difference is negligible but the savings aren’t.
People are quick to shame those who skip on eating out or skip on Starbucks coffee. A common thing you’ll hear is “just live a little”. But realistically, “just live a little” kept a lot of people broke and living paycheck to paycheck.
So cut the little $5 expenses every day and put it into a separate bank account. Get yourself in the habit of living on less than you think you need. At the end of the month, you might just have a couple extra hundred dollars laying around that can be invested for your future.
Tip 2 - Employers Retirement/Employee Share Purchase Plans
If you’re currently on a tight budget, investing in your employer’s retirement or employee share purchase plans may not even be on your radar at all. But trust me when I say, these plans are gold if used properly.
I’m currently working for a public company that allows employees to buy shares. Every 2 weeks when I get paid, a percentage of my paycheck gets sent to my employee share purchase plan account. The best part is that my company matches my contribution up to 30%. Some employers are different but if yours matches, that’s FREE money.
Also, you can often choose how much of your paycheck you want to have contributed to this account. Many employers allow you to go as low as 1% and have some kind of maximum contribution limit. I advise maxing out these plans but if you’re short on money, maybe starting with 1% of your salary is a good idea.
Then in the next year, you can increase that to 2%. If you plan it accordingly, you can increase your contribution to your account every time you get a raise. For example, if you get a 2% raise next year, you may want to bump up your contribution by 2%. Now you’re investing more money and earning more free money from your employer’s contributions. This is a wealth-building cheat code.