How should I start investing with a low income?
I am a university student in Canada and have about $1,000 (and rising) from paychecks at my full time job. I want to save my money to invest later. I don't know where to start looking to invest. Should I invest in mutual funds, ETF's, stocks, etc or should I wait until I have more money to invest?
That's a good question. Many people get frozen when trying to decide how and when to start investing. I'm a big believer in going for the basics first and making sure that you have adequate money saved for emergencies. I actually like opening up online savings accounts to fund different short-term savings goals as your first step to investing. You can nickname the accounts for different purposes and set up an automatic payment system to fund them on an ongoing basis. For example, you could have accounts for vacations, holiday spending and for emergencies. There is no minimum initial deposit amount either. By having these in place, you will find that you rely less on credit cards and you'll be more confident when you start investing.
Assuming that you've done those steps, my favorite place to send a new investor would be to go for an asset allocation type fund based on your your risk tolerance. If you're young, you might be willing to tolerate a higher level of volatility in your portfolio and thus you might consider going with an asset allocation fund that focuses on growth. This type of a fund would typically have about 80% invested within stock funds and about 20% invested within bond funds typically. You could go also for a target date fund tied to a date that's close to when you turn age 65.
Many funds have higher minimums to start out but some do not. Also, keep track of the expenses. Typically, you should spend no more than 1% for ongoing expenses for the fund and you should avoid paying a sales charge in buying the fund.
It is important to understand that costs really matter when it comes to investing. Commission-free ETFs that track indexes are a good start. Build a globally diversified portfolio using multiple ETFs from providers such as Vanguard or iShares based on your risk capacity. There are numerous risk capacity surveys that you can use online for free. As your nest egg grows, you’ll likely want to find an independent wealth advisor who can help you maximize your expected returns through exposure to more discreet asset classes, such as deep value and small indexes, along with asset location to maximize tax efficiency.
I know your anxious to start building your retirement and let compounding work for you. I made the mistake of putting too much money in retirement plans in my early 20s and not saving enough cash. Your 20s are EXPENSIVE. If you are like I was, you need to save for a better car, a house, furniture, an engagement ring, and a wedding. It is not sexy or exciting, but I suggest that you build up a good cash reserve to be able to pay for these predictable expenses that are coming up for you. If you invest this money, you may be forced to sell your investments at a loss when these expenses come up or decide to go into debt to pay these expenses to avoid recognizing your loss.