Financial Education: Investing on a Budget

Investing isn’t just for the rich. There are many ways to make your dollars, or nickels, work for you. Inexperienced investors can set aside and grow even a small amount of cash by gradually building on their returns.

Small-scale investing is also a smart way to stay on top of your budget and become more financially savvy. It can teach you to save, research your options, and develop a broader sense of control over your funds. The key is having enough discipline to budget your dollars and patience to watch it grow, slowly, over time.

Create a Fund

How well do you currently manage your money? To invest you need to start with a reliable personal finance system. This will help you figure out how much money you can realistically set aside each month.

1. Create a list of all of your monthly expenses. Budget for utilities, groceries, gas, and any savings that you regularly set aside for emergencies or other uses.
2. Estimate how much you’ll need for gifts, entertainment, or other discretionary expenses each month.
3. List any income or other source of money coming in.
4. Subtract your expenses from your incoming funds.

Don’t forget to include one-time expenses such as a workshop or trip you were planning. The amount you end up with lets you know how much extra money you’ll be able to safely invest each month.

401(k)

Does your employer offer a 401(k)? If so, this is a great place to start investing. A 401(k) is a retirement plan that lets you invest a small percentage of each paycheck as a payroll deduction. Even a tiny percentage of your paycheck can go directly into your 401(k) each week. Some companies will offer to match their employees’ contributions, which amounts to free money for you. And contributions are tax deductible, so anything you contribute will help you build your financial future.

IRA

If a 401(k) isn’t an option, consider investing in a personal retirement fund through a traditional or Roth IRA (individual retirement account). An IRA has tax advantages that allow your nest egg to grow in value over time. There are many investment options available within the account – stocks, bonds, mutual funds, even real estate.

IRAs have unique taxation rules, so your choice between Roth or traditional would depend on whether you expect your taxes to go up or not. Look for one with low or no minimums and make sure it makes sense for your financial situation.

High-Yield Savings Account

Maybe you’re ready to start investing, but you’re not sold on the idea of tying up even a small portion of your funds for decades. A high-yield savings account lets you avoid the withdrawal limitations of a retirement account. Many financial institutions have accounts where you can earn a higher interest rate on your hard-earned Hamiltons than you typically would with a traditional savings account.

Call a few different places and ask about their interest rates, fees, required initial deposit, balance requirements, and any other rules that might impact your decision.

P2P Lending

This one’s riskier but can produce quicker rewards, no bank necessary. Peer-to-peer (P2P) lending through an online service is just what it sounds like – the practice of lending money to individual borrowers or businesses. You could open an account with a small sum and start earning higher returns on your money than you would with a savings account. Some require hefty minimums, and the loans aren’t secure. That means there is a small chance of default that would cause you to lose the money you lent. Read the fine print to find out whether it’s worth the risk.

Spare Change App

Spare change apps link to your debit or credit card to invest tiny, incremental amounts of money. The most popular is Acorns. For a few dollars a month, it acts like a robo-advisor with an automated savings tool. When you shop it rounds up the total amount you spent on your purchases to the nearest dollar. The money goes into a diversified investment portfolio that you choose based on your financial preferences. It’s a good way to get started investing without making any major commitments.

There are other, more traditional lending options, such as low-cost brokerages. As a beginner, you should probably start with something low-risk that doesn’t have hidden fees or significant downsides. All of these common investing methods are ways to help make your limited funds grow. Once you start, keep an eye on your investments. With enough funds, you might decide to take on more risk or choose an area that will provide greater returns.

Control Your Limited Funds with Our Financial Services

Small-scale investing might be what you need to take your finances to the next level. At Currency Exchange, we have dozens of financial tools at your disposal, for just about any need. Stop on by your nearest location to discover more ways to stay on top of your personal finances.