Starting Small: How to Start Investing on a Small Budget

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Popular opinion is wrong, as normal.

It turns out you don’t need a lot of money to start investing.

In fact, investing just 5 bucks a day can turn you into a multimillionaire over 50 years. Not bad, right?

Sounds incredible, right? But it’s true! The trick is getting started. The earlier you get going, the better. Turning mini bucks into mega bucks takes time. But it’s absolutely possible.

In simple terms, you really don’t have to start rich to end up rich. Looking for advice on how to start investing with minimal money? Let us help!

Keep reading for top tips on starting to invest on a small budget.

1. Start Early

It’s worth emphasizing the benefits of starting to invest early.

The earlier the better.

Why?

One word: compounding.

This is the seemingly magical process of money growing exponentially (thanks to interest) over time. Albert Einstein himself described compound interest as the greatest invention of humankind!

Put $100 in an investment account. On average, over the long haul, you can expect an average annual return of 8% (it can be far more than that too!). After the first year, you’ll have $108. If the interest rate remains the same, you can expect $216 after a decade!

You’ve done nothing and more than doubled your money.

Now imagine putting another $100 into the same account every month. After 10 years you’d have $17,600! That’s $5,600 more than if you’d just put $100 in the piggy bank each month.

Do the same thing for 50 years, and what happens? You end up with a staggering pot of more than $693,000. Clearly, the longer you invest for, the more compounding works in your interest.

For that to happen, you must start early. Those figures were for only $100 a month! Imagine doubling, or tripling that over the long run!

That said, it’s always better late than never. Older people will just need to invest more heavily (and expect more risk in the process) to get started.

2. Set It & Forget It

Starting early isn’t the only vital thing to do though.

The figures in tip 1 only work out if you contribute regularly and leave the money alone.

That’s obviously easier said than done. It’s always tempting to take money out of an account when you know it’s there. Especially when life has thrown you a curveball and there are unexpected expenses to cover.

Likewise, it’s tempting to panic in troubling economic times. You don’t want to lose money on a downturn! However, the trick is to weather the storm. Panic selling is anathema to long term wealth. Ironically, a downturn in the market is better for you when you’re investing on a budget.

Suddenly, stocks and shares are cheaper; your money goes far further!

Set it and forget it investing is the best approach. Everything averages out over time. Create an account that operates automatically. Taking your money out opens you up to tax responsibilities and transaction costs too.

Every month, pay yourself first into an investment account (a 401(k) or Roth IRA are two great options). Then leave it alone until retirement!

3. Start Saving

You might be in a position where you literally have no money.

It is paycheck to paycheck, and the thought of having any spare cash at all is laughable.

However, there’s almost always the opportunity to cut costs and save up. It starts by realizing what you spend your money on currently. Sit down and figure out where you currently hemorrhage cash!

You don’t need much money to start investing. But you obviously need some. It’s time to get serious with your monthly outgoings and stick to a strict saving regimen.

Stop buying lunch as much. Stop eating out as frequently. Go out one less time each week. Stop paying for unnecessary monthly subscriptions. And so on.

Heck, try selling the things you no longer need! Downsize, downgrade, and so on. Do what you can to build up a buffer of cash to start investing with.

You can start your monthly investing, without the stress of running out of cash.

4. Pay Down Debt

Debt will be the bane of most people’s financial life.

It’s worth talking about briefly.

Let’s face it, the interest accruing on your debt may well cancel out the gains on your investments. Sometimes, paying down your debt first makes more sense.

Short term loans like those of CashNet USA (here’s a CashNet USA review) can be helpful at the time. But excessive interest rates can make them hugely expensive. Likewise, credit card debts quickly mass. Then there are student loans to think about.

Debt is never fun. Getting out of it will inevitably help your overall financial situation, including your ability to invest effectively.

5. Leverage Employer Matching

No-one would say no to free money.

But that’s effectively what happens when you fail to pay into a 401(k) retirement account that your employer offers matching payments for.

Essentially, many employers will match your pension pot investments up to a certain point. They add in the same amount as you do, up to a certain percentage of your salary! It’s literally free money.

Be sure to speak with your boss about the potential matching opportunities.

6. Find Low Transaction Fees & No Minimum Opening Costs

A quick one to finish:

Not all investment accounts are made equal.

We could write a whole new post on this topic. However, an important rule of thumb is to open and fund one with a low transaction cost and zero minimums.

In essence, it means you’ll be charged less for handling your money and you don’t pay anything upfront to get started. Both attributes save you significant sums of cash.

Final Thoughts on How to Start Investing

There you have it: exactly how to start investing when you’re on a tight budget.

Contrary to popular opinion, investing isn’t reserved for the rich. Anyone with access to even the smallest sums of money can (and should) get started. As we’ve seen, the sooner you start, the greater the reward; a little can become a lot with the right approach.

Hopefully, this post has provided a few rules to follow that’ll help ensure success.

Want more articles like this? Search ‘investing’ on the blog to read more advice on the subject.