If you’re living paycheck-to-paycheck, without much wiggle room in your budget, you might assume that investing just isn’t something you can do right now.
And in some cases you may be right. Sometimes you really do just need to focus on paying your bills, keeping food on the table, and getting your budget in order.
But you don’t need to have a lot of money to start investing. There are a number of ways to get started on a tight budget, and every little bit you can save and invest now will make things easier on you down the line.
Here are a few ways to get started.
Focus on What Matters
Most of the news you hear about investing focuses on the ups and downs of the stock market. And while that can certainly be entertaining, the truth is that those ups and downs are largely irrelevant when you’re just starting out.
There are two things that do matter though, and both your wallet and your anxiety level will thank you for focusing on them instead:
- Your savings rate: No other factor is even remotely important as your savings rate. Investing even a little bit now will help, and finding small ways to increase that savings over time go a lot further than trying to study or time the stock market.
- Costs: Cost is the single best predictor of future investment returns, with lower costs leading to better returns. And minimizing your costs is especially crucial when you’re on a tight budget, since even small fees can take a huge bite out of your savings.
Build an Emergency Fund
An emergency fund is simply money you keep in a savings account for those unexpected expenses life always seems to throw your way.
And while this isn’t technically an investment in the sense that you’re not putting money into mutual funds, stocks, or bonds, there are a few reasons why it’s a great first step:
- It’s an investment in your financial security, and a secure financial foundation makes it easier to invest in your financial future.
- Good savings accounts come without any minimum balance or contribution requirements, so you can get started with any dollar amount.
- Given that your savings rate is far more important than your investment return, you’re not sacrificing as much as you might think by keeping your money out of the market.
- The skills needed to build an emergency fund – namely making regular contributions and letting the money grow without touching it – are skills that will also help you build your investments. Honing them now will help you later.Invest in Your 401(k)
Here’s where we get into the traditional long-term investments.
Your 401(k) – or your 403(b) or 457 in some cases – is a retirement plan offered by your employer. You typically contribute a set percentage of every paycheck and choose from a collection of mutual funds in which you can invest. Your contributions are usually tax-deductible and the money grows tax-free until you withdraw it in retirement.
There are a few reasons why your 401(k) is a great place to start investing when you’re on a tight budget:
- It’s easy to setup. All you have to do is choose how much you’d like to contribute and you’re good to go.
- There are no minimum contribution requirements. You can start by contributing as little as you’d like.
- You may get an employer match, which could as much as double the impact of every dollar you contribute.
- Your contributions are tax-deductible, which means that the hit to your take-home pay is smaller than your actual contribution. You may even be eligible for the saver’s credit, which would put even more money back in your wallet.
- Contributing to your 401(k) up to the point where you’re maxing out your employer match is a no-brainer as a starting point. Especially when you’re on a tight budget, those extra dollars can make a big difference.
Beyond that, it’s worth noting that some 401(k)s are burdened by high-cost investment options, which might make other accounts more attractive as a next step. Which brings us to…
Start an IRA
If you don’t have a retirement plan at work, or if your employer doesn’t match contributions, you could consider starting with an IRA instead.
An IRA is simply a retirement account that you open on your own instead of through an employer. And it comes in two different flavors:
- Traditional IRA: Your contributions are tax-deductible and your money grows tax-free, but your withdrawals in retirement are taxed.
- Roth IRA: Your contributions are not tax-deductible, but your money grows tax-free and you can withdraw it tax-free in retirement.
While there are often reasons to prefer one or the other, for our purposes here all that matters is that they are both great ways to save and invest. The trick is finding one that one that doesn’t charge a lot of fees and that doesn’t have minimum account balance or contribution requirements.
Betterment could be a good choice if you’re looking for an easy, low-cost way to open an IRA without any account minimums. You can review other IRA providers here.
Pay Off Debt
Like building an emergency fund, paying off debt is not an investment in the way that we typically think about investments.
But if your objective is simply to make the most out of the few dollars you have available to save, paying off debt might be your best option.
Think about it this way: Experts seem to agree that 7% to 7.5% is a reasonable estimate for long-term stock market returns. But those returns are not guaranteed, there will be lots of ups and downs along the way, and a more balanced portfolio that includes bonds may reduce that estimate to 6% to 6.5%.
On the other hand, every extra dollar you put towards debt earns you a guaranteed return at the rate of your interest charges. Putting an extra dollar towards your credit card that charges you 15% in interest earns you a 15% return. An extra dollar towards your student loan with 6% interest earns you a 6% return.
Put simply, paying off high-interest debt often allows you to get stock market-like returns without all of the uncertainty. If that’s not a smart investment, I don’t know what is.
Invest in Yourself
Learn new skills. Negotiate a raise at work. Find ways to earn some income on the side.
These investments in yourself generally only cost some of your time, but can pay off in the form of more income — which means you’ll have more money available to save and invest.
And given that your savings rate is the most important part of your investment plan, this may be the single best move you can make.