You don’t have to be a millionaire to invest. Investing is how you become a millionaire. We look at small investments on a small income.
If you aren’t making significant money right now, I hope things get better. But they don’t always. And you might have a job you love that just happens not to pay very well. Nothing wrong with that. I’d rather have a low paying job I love than a high paying one I hate.
If you already don’t have a lot of money to work with, you can’t just accept investing fees as the price of doing business. Americans lose $600 billion a year on investment fees.
Here is an example to illustrate the point.
A fee of 1.25% sounds good right, really low! If you invested $10,000 with a 5% annual return and that 1.25% annual expense ratio, in one year, you would lose 25.9% of that return in fees.
If you want to avoid high fees, it’s best to DIY. Financial advisers don’t want to deal with people investing in the small amounts of money we’re talking about here. They will, but you’ll be paying for it. The average rate is 1% but ranges from .081-2.08%.
You don’t need an adviser to invest in the stock market. You just need to find a service with a low minimum to get started and low fees. Betterment has no minimum investment and no minimum balance. They also have very low fees.
And it doesn’t take much knowledge to get started. The biggest decision you have to make is how to balance your investment between stocks and bonds.
The younger you are, the more heavily weighted towards stocks you should be. Stocks are riskier but have a higher rate of return than bonds. The closer you get to retirement, you balance more towards bonds.
Not everyone will agree, but my most important personal finance rule is to pay yourself first. You can’t spend money you never see. Automate everything you can, your utility bills, your rent or mortgage, and most importantly, the money you invest.
The amount of money you want to invest each month should be fitted into your budget, not just whatever money you have leftover at the end of the month. Because if you don’t set it aside, there often isn’t any money left at the end of the month, you spent it.
But don’t get overly ambitious. It’s great that you want to start investing $100 a month rather than $50 but make sure the difference is accounted for in your budget. You can pull money out of your investments to cover a short fall, but that goes against the whole buy and hold ethos of hands off investing.
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Avoid Lifestyle Creep
Maybe you got a better job or a raise at your current one. Now you have some money! And you want things, and you want to do things. Buying things and doing (some) things costs money.
If you made a big leap, from a broke college student to having a well paying, grown-up job, you might be tempted to upgrade every facet of your life. A nicer place, a better car, a bigger wardrobe. And you can afford it. But that’s not how wealthy (wealthy, not rich) people think in these situations.
They take that new money and invest it while maintaining their old standard of living. It doesn’t mean you can’t spend a little of that cash rewarding yourself for the hard work that saw you graduate or get a raise or a new job; it just means that you don’t go crazy “treating yourself.” You are not a puppy.
Open A Roth IRA
A 401k offered by an employer is a great way to invest for retirement, especially if your employer offers matching funds. But many low-wage workers don’t work for employers who offer a 401k plan. That’s okay, though; you still have access to a retirement account.
Unlike a 401k or traditional IRA account, the money you put into a Roth IRA goes in already taxed at the low rate you’re paying now. When you withdraw this money during retirement, after age 59.5, it won’t be taxed.
Claim Tax Credits
There is a tax credit called the saver’s credit for low to moderate income tax payers who save for retirement. If you are eligible, you can claim this for the following retirement accounts: 401k, 403(b), 457 Plan, Simple IRA, SEP IRA, traditional and Roth IRA’s.
Some low to moderate wage workers may also be eligible for the Earned Income Tax Credit. If you earn less than $52,427 per year, check here to see if you qualify. If you do, it can reduce the amount of taxes you owe and may give you a tax refund.
Cut Out Frivolous Spending
I’m not going to bang on about this. Low-wage workers are likely already pretty careful with their money. You have to be when you’re a paycheck away from not being able to pay your rent. But just watch out for the little, dumb stuff. The soda at the gas station, the extra half a dozen things that weren’t on your grocery list.
Track every cent you spend for one month. Mint is great, but if you use cash, and a lot of us do for those small items, it might not be showing up. Track those cash purchases too and see what you can cut out. If your investment account doesn’t have a minimum, you can redirect the $7 or so you spend on those sodas each week to your account.
Sure, $7 doesn’t seem like much, but we’re not working with much just yet so it counts too. Ronald Read was a Vermont man who worked as a mechanic and then a part-time janitor when he got bored being retired. When he died in 2014, he left $6 million to a library and hospital.
He lived simply and invested his money. You can bet that he didn’t think $7 was too small an amount to bother saving. If it was good enough for him, it’s good enough for you. And if it worked for him, as it clearly did, it will work for you too.
Everyone deserves to have a comfortable retirement and everyone can. Making small investments every month will certainly add up. It just takes planning, discipline, and knowing how to take advantage of the breaks offered to you.
Featured Image Photo Credit: “Making Money” by 401(k) 2012 on Flickr