Americans often have the misconception that they need a loaded bank account to invest in the stock market.
That’s not the case. While stocks such as Warren Buffett’s Berkshire Hathaway Inc. (ticker: BRK.A, BRK.B) cost about $590,000 per share, there are plenty of other stocks, bonds and funds that regular folks can buy with minimal cash.
However, finding the extra money in your household budget to invest regularly requires creativity and discipline.
Don’t wait to get started. Here’s how to invest for retirement with little money:
— Be a saver.
— Organize your finances.
— Pay yourself first.
— Take advantage of 401(k) matching contributions.
— Automate your financial investments.
— Boost your income.
— Leverage extra cash.
— Learn how to invest.
Be a Saver
Get used to the idea of saving money. You can start gradually and continue building assets over time.
“Even $2 per week or $20 a month helps get you going,” said Mark Williams, chief executive officer at Brokers International in Atlanta, in an email. “It doesn’t matter how much you save at first. Learn to be a saver. Understand that money has the ability to earn money, so start learning about compound interest and the power of using pre-tax dollars like a 401(k) or IRA to help build wealth and lower taxes at the same time.”
Set a realistic budget that allows you to spend on essential items while setting aside money to invest, even if it’s just a small amount. Make sure to review your budget monthly.
“If you treat investing like a monthly expense, you’ll be able to put aside money regularly to help ensure your long-term financial health,” said Maya Sudhakaran, head of growth and acquisition at New York-based investment app Plynk Invest, in an email.
Setting up a monthly recurring contribution to an investment account is easy. “It doesn’t have to be large to start out,” Sudhakaran said.
“This will give your money a chance to grow over time,” Sudhakaran added. “Additionally, setting up automated investments ensures consistency in your investing habits each month, even if your budget is tight.”
Organize Your Finances
The key to getting on track with your day-to-day investment campaign is to get focused.
“If you want to truly start your wealth-building journey without a high income, start by turning off the noise, shifting your mindset, and focusing on what’s right in front of you,” said Tyler Weerden, a financial planner and founder at Layered Financial in Tolland, Connecticut, in an email. “Start by writing down your investment plan. It’s no secret that writing down ideas and strategies helps people achieve financial goals.”
“Your financial net worth is not how you should judge your self-worth,” Weerden said. “Having what you perceive as a low income can be very difficult mentally.”
For anyone beginning their investment journey without a high income, Weerden recommends following these steps:
1. Establish an emergency fund.
2. Take advantage of your company’s 401(k) employer match.
3. Pay off high-interest debt.
4. Automate a specific dollar amount, such as 5% of your regular paycheck, to be deposited in your company retirement plan.
5. Get comfortable with your new take-home pay after investing, then reassess your situation. Ask yourself, can I contribute more if I shift my spending?
Pay Yourself First
People with low funds looking to save money for retirement can build their net worth by paying themselves first.
“Even if it’s just a small amount, automate some of your paycheck to deposit directly into your employer-sponsored retirement plan,” Weerden suggested. “The power of compounding interest makes time our most valuable asset. Someone who starts investing at age 20 versus age 30 will have a much easier journey to financial freedom by simply getting their dollars compounding sooner.”
“When you get a pay raise, bump up that percentage,” Weerden added.
Paying yourself first through a company savings plan may also save you from paying more taxes.
“If you choose to invest in your retirement plan with pre-tax dollars, your taxable income will decrease, therefore reducing how much you pay in taxes,” Weerden said. “Automating contributions to a health savings account (HSA) from your paycheck will also reduce your federal taxable income, and you won’t have to pay FICA tax on those contributions.”
Take Advantage of 401(k) Matching Contributions
One of life’s most important financial decisions is the choice to participate in an employer-sponsored retirement plan. Many traditional 401(k) plans offer to match employee contributions, which earns you free portfolio cash.
“Perhaps the worst financial mistake anyone can make is turning down free money,” said Robert Johnson, professor of finance at Creighton University in Omaha, Nebraska. “If you don’t contribute enough in a 401(k) plan to earn that company match, you’re basically turning down free cash.”
Many people prioritize paying down debt so much that they don’t participate in their company’s 401(k) plan. That’s a big mistake, Johnson noted.
“People should do whatever it takes to participate in their company’s 401(k) plan to get the full employer match and reduce their tax bill,” he said.
[New 401(k) Contribution Limits for 2024]
Automate Your Financial Investments
Making retirement and savings contributions automatic is an easy and effective way to invest a little bit of money on a regular basis.
“People should try and automate as many financial decisions as they can,” Johnson said. “Doing so makes saving money a habit. And habits — good or bad — develop over time.”
Johnson advises having a small percentage of money taken out of each paycheck and put directly into an investment fund — most appropriately, a low-cost stock index fund.
“This strategy means you will be putting money into the market whether stocks are rising, falling or treading water,” he explained. “You’ll practice dollar-cost averaging and build significant wealth over the long run.”
Once you’ve automated your accounts, you can easily invest in stocks and funds without having to click a button.
“Companies like Stash and Robinhood make it easy to get started in less than 15 minutes,” said Shinobu Hindert, a San Diego-based financial planner and author of the book “Investing Is Your Superpower,” in an email.
Boost Your Income
Cutting back on your household budget isn’t the only way to expand your cash flow. Getting a part-time gig can add to your bottom line.
Over 22 million Americans work part-time for noneconomic reasons, according to the St. Louis Federal Reserve. Meanwhile, 64 million people work gig jobs overall, as noted in a 2023 study by freelancer platform Upwork.
Even working a few hours a week at popular freelance jobs like package delivery, tutoring or dog walking can bring in hundreds of extra dollars.
The average monthly income tied to side gigs is $810 per month, according to Bankrate.
[READ: 7 Things to Know Before Starting Your Side Hustle]
Leverage Extra Cash
There’s no law that says you have to spend financial windfalls such as an inheritance, workplace bonus or tax refund.
Each time you receive a significant lump sum, deposit a portion into an investment or a retirement account. Thanks to compound interest, even $20 per week adds up over time.
Let’s say you’re a career professional just starting out. After a year into your career, you earn a weekly raise of $20. Instead of spending that money, you invest it in a stock index fund, earning 6% a year on average.
If you continue investing $20 per week for 40 years at a 6% annual gain, you’d have $170,610 tucked away for retirement.
Learn How to Invest
Understanding the basics of investing can prevent you from making costly mistakes early on. Broaden your knowledge by taking an online stock market investment course, listening to personal finance podcasts, or speaking with a reputable financial advisor. It takes minimal effort and can pay off big down the road.
“Financial education platforms will teach you about important factors, from determining your risk tolerance to learning about different types of investment products,” Sudhakaran said. “Start small and simple. Each investment decision should be an informed one as you learn which types of investments are best by educating yourself on the financial markets.
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How to Start Investing and Saving for Retirement With Little Money originally appeared on usnews.com
Update 02/06/24: This story was previously published at an earlier date and has been updated with new information.
