How to Start Investing on a Budget: A Beginner’s Guide

April 5th, 2021

Think you need to be rich to start investing? Think again! These days, investing really is for everyone, even if you’re starting from scratch. So if you’re ready to get more out of your hard-earned cash but don’t have a huge nest egg burning a hole in your pocket, you’ve come to the right place. We’re here to help you start investing on a budget.

But first, are you ready to start investing?

Investing is a great way to passively grow your wealth over time. Historically speaking, money invested in the stock market has doubled in value every 7-10 years. So if you’re thinking in terms of decades, you can see some spectacular gains. And that’s great.
But there is a catch. Investments that tend to earn the most over time also tend to fluctuate the most – more ups and downs over the course of days, weeks, months. This means investing is better suited for long-term goals. So before you make investing a priority, you’ll want to make sure your near-term financial goals are in good shape – for example, your emergency fund. A typical rule of thumb is to have between three and six month’s worth of living expenses in a fully funded emergency fund. You don’t necessarily need to have that full amount before you start investing, but you should have at least some money in case you’re faced with an emergency.
Also, if you have any high-interest debts, like credit card debt or other personal loans, you’ll typically want to pay those down ASAP before you start investing. It’s unlikely you’ll earn a higher rate of return on your investments than you’ll be paying in interest.
If your immediate financial needs are met, then it’s time to start thinking about investing.

Getting started – consider a dedicated retirement plan

The first step will be to set up an investment account where you can hold your investments (stocks, bonds, funds, etc). And dedicated retirement accounts, like a 401(k) with your employer or an Individual Retirement Account (IRA) on your own, can be a great way to get started, especially if you’re on a tight budget. That’s because these accounts are tax-advantaged, meaning they’re specifically designed to offer you a tax break. Less taxes means your money will grow even faster than it would otherwise. And who doesn’t like that?
A few more details on each…

401(k) – offered through your employer

If you’re lucky enough to have a 401(k) offered through your employer, consider starting there. Some employers even match a portion of your contributions, which is essentially free money. You can decide how much or how little to contribute from each paycheck. So even if you can only swing a small amount, it’s usually worth getting started, especially if you get a match.

Individual Retirement Account – a great alternative

If you don’t have a 401(k) through work, that’s okay too. You can set up an Individual Retirement Account, or IRA, on your own which also offers an attractive tax benefit. Again, you can contribute as much or as little you want, but it’s good to get in the habit of making regular contributions early and seeing your money grow. And that will be key if you want to start investing on a budget.

For more financial flexibility, consider opening a brokerage account or robo-advisor account

Retirement accounts are great because of the tax-advantage, but there is a downside. For the most part, your money is tied up until retirement (which is kind of the point).
If you want a more flexible way to invest your money where you can access it anytime, then you’d want to open a brokerage account or a robo-advisor account.

Brokerage Accounts – for DIY investors

With a brokerage account, you’re free to buy a wide range of investments, from stocks and bonds to funds. Really it will all be up to you. It’s not that hard to come up with a reasonable portfolio that’s right for you (we can help if you want to sign up and learn more). And you typically don’t need much money to start. In fact, most brokerage account providers have no/low minimum requirements to open an account.

Robo-advisors – outsourcing the portfolio management

If you’re looking for a little more assistance, then consider a robo-advisor. With a robo-advisor, they’ll select and manage the funds for you. So all you have to do is transfer your money and answer a few questions about yourself and your goals. However, they will charge an annual fee on top of the fees charged by the funds they select for you. But overall, the costs are pretty manageable. You shouldn’t have to pay more than 0.25% – 0.5% of your assets in annual fees, which is a lot less than most human advisors charge. And while some robos have higher minimum balance requirements, there are some great options with low/no minimums.
► Browse brokerage accounts and robo-advisors

Make regular contributions and ride out the ups and downs

As we mentioned, investing takes time. And you need to be prepared for some ups and downs along the way – you can’t get too locked into the day-to-day movements in your account. The key will be to make regular contributions to your account and give the money time to grow.
This will be the case even if you’re looking to start investing on a budget.
Let’s say you can only contribute a few dollars each week or month. That’s alright. Get in the habit of setting aside what you can, and then find creative ways push yourself to save even more.
If you find yourself spending whatever money is sitting in your checking account, then take advantage of direct deposit and send money directly from your paycheck to your investment account. That will eliminate the temptation to spend it, and you might be surprised at just how much you can put away each month. Working with a budget can help too. If you make paying yourself a priority, then saving and investing will become second nature.
Your investing strategy doesn’t need to be overly complicated either, especially when you’re just starting out. Most new investors can create a low-cost, diversified portfolio with a few index funds. Simple is often better when it comes to your portfolio.

Be patient and build on your success

The key to any of these approaches is to get started early and to stick with it. Small dollars can add up to large sums over time, but you need to hang in there.
Over time, your balance will start to grow and you can push yourself to save more as you get the hang of it. And when you see your wealth and passive income grow year after year, it can start to get addictive and even fun. Build good habits, build your confidence, and you’ll build your wealth.
And if you want to learn more about how to start investing, we have you covered.


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