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The word invest often brings to mind images of the stock market, really rich people, and maybe a private jet. While people generally understand that they “should” invest in their 401(K), many people don’t know why. Some people just choose not to do it. Others blindly pick something and hope for the best.
If you are in the not investing category, then you really should start.
ANYTHING IS BETTER THAN NOTHING!
If you are in the blindly investing group, then this post will help you know that you can not only invest, but do it well even with a low income.
Tips for Investing with Little Extra Cash
1 The old sayings “set it and forget it” and “every little bit helps” apply here. If you don’t have a lot of extra cash then you need to force yourself to automatically invest money. Usually that is in a 401(k), but it doesn’t have to be (read about your options here). If you only have about $50 left at the end of each month, start by investing $25 automatically. You’ll adapt to having $25 less and your money will start to grow.
Now remember, this is just a start, you will need to invest more than that. But if you put $25 into a savings account each month for thirty years you’d end up with $9,000. If you invest that money (assuming an average 7% interest rate which is pretty normal) you’d end up with $28,338.24. Do you see why you need to get started?
2 Invest more with every pay increase. Usually pay increases are so incremental that they are hard to notice. Many people get a 3% pay increase each year(ish) to adjust for increases in cost of living. To give you an idea of how small that is, if you make $1,000 a month a 3% increase will give $1,030 a month. Thirty dollars is easy to blow off, but it can be powerful.
Let’s go back to our previous example. If you started by investing only $25 dollars, then added only HALF of your pay increase the second year (so you still get to blow $15 bucks) then at the end of the 30 years you’d have $44,060.61. Is nearly $14,000 more dollars in retirement worth $15 each month that you’d forget what you spent it on anyway? And remember you still get to keep $15 more dollars in your pocket each month.
3 Beware of fees, if you already have very little to put in then you don’t want to be nickled and dimed out of your growth. Virtually every investing broker will charge you fees to manage your accounts (that’s how they make money). BUT those fees vary greatly depending on which broker and which account. I’ve seen fees as low as .16% and as high as 2.6% in just the accounts offered through my employer!
What’s the big deal? 2.6% is tiny, right? Let’s look back at our previous example. If you have a .16% fee than you’d have about $44,000 at the end of 30 years, but if you have a 2.6% fee you’d have only around $28,000. For those keeping track at home, that means the 15 extra dollars you invested each month would be ENTIRELY used up on fees! I would recommend that you find out what fees you are being charged on your retirement accounts and if they are higher than 1.5% change them immediately, if they are higher than 1% see if you have lower options available. It is worth taking a couple of hours to understand your investment documents, it can save you thousands of dollars!
4 When you get extra money consider investing half of it and enjoying the rest. This tip is a lot like the tip for investing your raise. When people get a windfall, like a a tax return or a bonus as work, their first reaction is usually to buy something nice for themselves. Remember that the sooner you invest more the better off you are.
Let’s say you never increased your monthly contribution by $15, but you received a tax return in the first year for $1000. If you put $500 into your investment account upfront (keeping the other $500 of course), then let the $25 dollars a month grow for 30 years. If you simply starting with an extra $500, you’d end up with $32,144.36. That is nearly $4,000 more from just putting $500 in upfront. And you still get to have fun with that extra $500 from your tax return.
5 Use a ROTH account to your advantage. Remember that a ROTH account allows you to be taxed upfront on your contributions then NOT taxed later when you pull money out. If you are a low income earner this can be a great way to invest because you won’t be taxed on any of your investing growth.
Let’s say that you make $10,000 and you are taxed at 10% (those aren’t real tax percentages, but it will make it easy). If you decide to invest the remaining $9,000, you will have $68,510.30 that you can use tax free. If you instead invest that whole $10,000 you will end up with $76,122.55 BUT if you pull that out you will be in an higher tax bracket (say 20%) so you can really only use $60,898.04. You miss out on nearly $8,000 because of taxes!
You Can Invest No Matter How Much Money You Make
I will admit that it is easier to invest when you have a high income. That is why you should also focus on making more money. But that is no excuse not to start. Remember that just $25 a month is the difference of $28,000 more dollars in retirement! If this is all a bit overwhelming, just start with one of these five tips and add more as you go.
But just start!
If you want to play with investing numbers try visiting investor.gov. If you want to see how fees will impact your investing, try moneysmart.gov.au.
What have you done to invest more even though you don’t make a high income? What other tips do you have for investing with a low income?
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Definitions
Invest: Giving an entity (or an individual) money whether in the form of stocks, bonds, or buying any other type of asset in hopes of getting more money back in the form of interest.
Stock Market: A place where you can buy and sell ownership within certain companies. Buying company stock is a form of investing and is usually what a 401(K) or other investment account invests in.
410(K): An account offered through your employer that is not taxed upfront, but it is taxed when you pull it out.
Cost of Living: How much money it takes to buy basic needs in a certain area. This usually increases every year because of inflation. Meaning that it takes more money to buy what you usually buy each year because money isn’t worth as much as the previous year.
Investing Broker: A company that manages your investment account. They offer a variety of options or funds for you to purchase, and fees vary from fund to fund and company to company. Examples of Investing Brokers are Vanguard, Fidelity, Charles Schwab, etc.
Windfall: Any time you receive a large amount of money–it is usually unexpected and irregular. This can be anything from an inheritance to winning the lottery, but a tax return can also count.
ROTH Account: Any retirement account that is labelled a ROTH account (e.g. ROTH 401K or ROTH IRA, etc.) is a tax advantaged account that taxes your contribution upfront but NOT later when the money is pulled out (unlike a traditional account which is the opposite).
