For too long, we've been told that investing is only for people with a lot of money.
Time has changed and it has changed to accommodate those people who don't have a lot but want to invest money in the stock market.
Now, you don't have to be rich first before you can invest next. In actuality, it's always best to start investing as early as possible whether you're rich or not.
As you can see, I didn't say “you need to invest when you're rich”. I said it's best to start early and there are reasons for that.
Now more than ever, you can invest and make your money grow into thousands or even millions regardless of how little or much you put into the market.
The sooner you start, the better your finances will be.
Why Do You Need To Start Investing Early?
Have you heard the old saying ‘Time is gold'? If you have or have not, investing early clearly is an example of this saying.
The earlier you invest, the more time your money will likely compound or grow. What does this mean? It means that your money would earn interest on top of interest on top of interest and so on.
By the time you know it, your money will have grown multiple times.
As a matter of fact, if you invest at age 20 vice at age 30, you could earn way more even with less money invested. That's because you simply invest when you're younger. It may sound weird, but it's not.
For example, if you invest $$5,000 at age 20 at 10% return rate and leave it in the stock market for 30 years, you would have $87,247.01. On the other hand, if you start at age 30 and invested $10,000 at 10% return rate and leave it for 20 years, you'd have $67,275.00.
At age 50 (that's when you pull your money in this example), you would have more money even when you only invested $5,000.
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How To Start Investing When You're Cash Strapped
Now that you know how important it is to invest earlier than later, it's now time to answer the question of how to start investing when you don't have a lot to begin with.
1. Know your investments.
The very first rule of investing is to identify your investment risk tolerance and goals. Are you geared towards safe investments like bonds and money market? Or do you want riskier investments like small cap funds that could reward you with higher returns?
As with goals, do you need the money to grow in 5, 10, or 15 years or something else? Your goal will determine the type of investments you need to put your money in.
You don't need to be an expert, know the ins and outs of investing, and predict the stock market to make great investment decisions.
You can buy index funds or mutual funds, which are combination of many stocks and/or bonds lump together, and hold them for a long time. I particularly like low-cost, high-yield funds.
There are a lot of online trading platforms out there that offer low-cost, high-yield funds. My wife and I use Ally Invest and Charles Schwab because of their wide options of high-performing funds. These platforms are great options over financial institutions, which charge high fees (something that may not be for your best interest).
We manage to get an average of 22% return rate every year with these online trading platforms.
Read: 10 Basic Rules of Investing
2. Start small.
Not to scare you though, but investing in the stock market is scary especially when you are basically handing off your money to the stock market, which fluctuates all the time.
That's understandable since it's money we are talking about.
Now, there are online platforms that will help you invest money whether it's a cent or $5. Acorns, for example, allows you to invest as little as $0.01. It will roundup your purchases and invest those cents across 7,000 stocks and bonds to improve your return while reducing risk.
Sometimes, I call Acorns “invest $1 and make profit later”.
Acorns is the best place to start especially when you don't have a lot of money to invest. You can even start without investing a cent. Acorns will give you cash back offers far higher than those from the biggest cash back sites out there. Plus, you get $5 bonus if you sign up using my link. These are just remarkable. Click here to start with Acorns.
There's also Stash, which allows you to start investing in exchange traded funds (ETFs) and stocks for as little as $5. It lets you buy a fraction of a share if you can’t afford the whole thing.
Also, Stash lets its users build their own portfolio by suggesting investments, which match up with their own beliefs, goals, and tolerance for risk. Just an added bonus, Stash will give you $5 BONUS to start investing. Click here to start investing with Stash.
3. Get the most from your employer.
A lot of employers now contribute to employees' retirement accounts through the 401(k).
Make sure you get the maximum contribution your employer matches. It's free money that you don't want to miss. If your employer, for example, will match dollar per dollar up to 5%, then, make sure you contribute 5%. If you have extra money, then, make more than the max contribution your employer will make.
In fact, two-thirds of Americans aren't putting money in their 401(k). That's money people are leaving off the table.
It's always best to talk to your employer's human resources or benefits division to get information regarding employer's contribution to your 401(k).
Read: 7+ Tips Before Investing in the Stock Market
4. Be mindful of investment fees.
Not all investment funds are created equal. Not all of them will have low fees.
According to Morningstar Research, the average expense charged by ETFs and mutual funds is 0.61%. It doesn't look alarming, but wait until you calculate the expense for the next 20 years.
If you have $100,000 invested, you would be paying $690. If that $690/year is invested instead at 15% compounded annually for 20 years, the result would be $73,681.15. Imagine if you have $150K, $200K, or more invested and the fees associated with those amounts. Yikes.
Compare fees of each funds you have to make sure you aren't paying too much. I know it's easier said than done but a simple analysis like what Blooom offers for FREE can make a difference on how much you would have years down the road.
Blooom will spot hidden fees, tell you if your portfolio is too aggressive or not, and find out how much you could be missing out on by DIY-ing your 401k. A lot of its clients cut their hidden investment fees by 46%. Blooom clients' collective lifetime fees saved is over $776,465,300 and counting. Click here to use Blooom for FREE.
Your investment funds should be working for you and not the other way around.
5. Don't just cut back, but also pay yourself.
A lot of people say that when you are cash strapped and want to invest, the best way is to cut back on something else to free up some money.
That is absolutely true, but sometimes, this attitude associates investing with deprivation. While many people say it's better to suffer now so you can have a better nest in the future, there's always a way to not be deprived and still invest money.
You can always reward yourself for something you do that's unrelated to your finances. For example, you volunteered for a home shelter. Because of that, you reward yourself with a small amount of money, which could go to your investments.
Simple and small things like what I just stated can make a big difference in the future.
Read: 6 Strangest, Best Financial Lessons I’ve Learned
Final thoughts:
Just because you don't have a lot of money doesn't mean you can't start investing. Remember learning how to start investing doesn't involve a whole lot of money. You can start now with as little as possible. Remember that investing now even with a small amount can make a big difference in the future.
Are you ready to learn how to start investing? Do you have any questions you would like for me to answer?
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