How to Start Investing on a Budget
Think you need to be rich to start investing? Think again! It’s 2020 folks, and in this day and age, anyone can do it, regardless of how much you’re starting off with. So if you’re ready to get more juice out of your hard earned moolah but don’t have a huge nest egg burning a hole in your pocket, you’ve come to the right place. Here’s what you do.
First off, make sure you have an emergency fund
Investing is great. It helps you grow your money for down the road. But you should also consider your near-term financial needs. And if you don’t have at least some money in your emergency fund, you should start there.
You don’t necessarily need a fully funded emergency fund (we usually recommend having between 3 and 6 months’ worth of living expenses on hand eventually). But you should have at least some money in case an unexpected expense hits. Or if you’re plotting to take over the world or whatever.
Next up, consider a dedicated retirement plan
Dedicated retirement accounts, like a 401(k) through work or an IRA on your own, can be a great way to invest if you’re starting from scratch. They’re designed to be tax-advantaged, meaning you’ll get some kind of tax break with each one. And that means your money will grow even faster than it would otherwise. Which is nice.
If you’re lucky enough to have a 401(k) offered through work, consider starting there. Some employers even match a portion of your contributions (essentially it’s free money). You can decide how much (or how little) you want to contribute from each paycheck, so even if you can only swing a small amount, it’s worth getting started.
Individual Retirement Account
If you don’t have a 401(k) through work, don’t throw the pity party just yet. You can set up an Individual Retirement Account, or IRA, on your own which also offers an attractive tax benefit. Again, you can contribute as much or as little you want, but it’s good to get in the habit of making regular contributions early.
For more flexibility, open a brokerage account or robo-advisor account
Retirement accounts are great because of the tax-advantage, but there is a catch. For the most part, your money is tied up until retirement (which is kind of the point).
If you want a more flexible way to invest your money where you can access it anytime, then you’d want to open a brokerage account or a robo-advisor account.
With a brokerage account, you’re free to buy a wide range of investments, from stocks and bonds to funds. Really it will all be up to you. It’s not that hard to come up with a reasonable portfolio that’s right for you (we can help if you want to sign up and learn more). And you typically don’t need much money to start. In fact, most brokerage account providers have no/low minimum requirements to open an account.
If you’re looking for a little more assistance, then consider a robo-advisor. With a robo-advisor, they’ll select and manage the funds for you. So all you have to do is transfer your money and answer a few questions about yourself and your goals. However, they will charge an annual fee on top of the fees charged by the funds they select for you. But overall, the costs are pretty manageable. You shouldn’t have to pay more than 0.5% of your assets in annual fees, which is a lot less than most human advisors charge. And while some robos have higher minimum balance requirements, there are some great options with low/no minimums.
► Browse brokerage accounts and robo-advisors
Be patient and stick with it
The key to any of these approaches is to get started early and to stick with it. Even if you only have a few dollars to contribute each month, do that. Your balance will start to build up and you can push yourself to save more as you get the hang of it. Build good habits, build your confidence, and you’ll build your wealth.