How to Invest on a Budget
It is a common misconception: investing is only for the rich. But it's not. Investing is for all Americans, young and old, even if it means starting small.
"If you insist on waiting until
you have 'enough' money to
invest, you might find your
definition of ‘enough' growing
and growing, and you might
never start at all."
This misperception is particularly common with young Americans. In fact, among Millennials without investment accounts of any kind—including a 401(k) or other retirement account—about 50 percent cited insufficient savings or not enough income as a barrier to investing, according to a recent report by the FINRA Foundation and CFA Institute. Meanwhile, 44 percent said they didn't invest because they were focusing on paying off debt.
Of course, there is no denying that paying off debt and establishing sufficient savings are important financial goals, but they don't always have to be a barrier to investing. After all, if you insist on waiting until you have "enough" money to invest, you might find your definition of "enough" growing and growing, and you might never start at all.
If you start small and invest regularly, you may find that time is on your side and that you can save for the future, invest and pay down debt if you come up with a good plan—and stick to it. For those who don't think they have enough money to start investing, here are four tips to help you get started.
Start with a Tax-Advantaged Retirement Account
A great place to start investing is in tax-advantaged retirement accounts, such as a company-sponsored 401(k) or an IRA. With contributions to a traditional 401(k), every dollar you save will reduce your current taxable income by an equal amount, which means you will owe less in income taxes for the year. The same is true for contributions to a traditional IRA, as long as you don't bump up against the income limits that the IRS sets. Need to start small? Employer-sponsored plans in particular often let you invest as little as one percent of your pay each pay period—and it's easy (and smart) to increase that amount each year.
Say you make $40,000 a year and decide you can put $100 per month toward a traditional 401(k) for a total of $1,200 this year. That would reduce your federal income tax bill for the year because you would then owe taxes on only $38,800 rather than $40,000. If you're single and take the standard deduction, you'd owe $3,025.50 according to the 2018 IRS tax rate schedule, compared to a total tax bill of $3,169.50 if you did not contribute—a tax savings of $144. That's an extra $144 you could use to further bump up your savings.
Even better: if your employer offers a 401(k), they may also offer a matching contribution, which is essentially free money. When you start investing, make sure you aren't leaving any free money on the table.
Make Investing Part of Your Lifestyle
One of the funny things about people who say they don't have enough money to invest is that people say that at all income levels. That's because "lifestyle creep" can be a real thing. We challenge you to commit to making saving and investing part of your lifestyle. That means making sure you budget for it, just like you budget for your rent or Netflix. And it means giving your future self a raise whenever you get a salary bump by setting some of it aside for your savings and investment accounts.
When you find a place to start, no matter how small, automate it so you stick to the plan. Whether its $5 or $500, set up an automatic transfer out of your checking account into a separate savings account or investment account so you can't touch that money for your day-to-day expenses. If you are starting small, you may want to read up on micro investing.
Establish an Emergency Fund
Whether or not you have debt, a great place to start investing is in the security of your financial future with an emergency fund.
There will always be large, unexpected expenses in life, whether it is a medical bill, a flat tire, a family emergency that requires a plane ticket home or something else unexpected. An emergency fund prepares you for that inevitability and allows you to tackle the challenge without resorting to your credit card and landing yourself in a pile of high-interest debt.
Ideally, an emergency fund should be big enough to cover three to six months' worth of expenses, but you can start small—even a few hundred dollars can help give you a buffer as you get started.
Don't Ignore High-Interest Debt
As we already mentioned, paying off debt is an important financial goal. This is particularly true for high-interest debt, such as credit card debt. Paying off high-interest debt can be seen as an investment in its own way. You can view the money you save on interest as the return on your investment in paying it down.
But not all debt is created equal. And you don't have to be entirely debt free to invest. Sometimes it can make sense to invest while still carrying some debt, such as a mortgage or student loans, which is the case for most Americans.
Whether or not investing makes sense for you will depend on a number of factors, such as how the expected rate of return on your investments compares to the interest rate on your debt and whether your interest payments or investments are tax detectable. You may also want to consider how long you plan to let the investment grow to consider the extent to which compound interest might work in your favor.
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