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How To Invest on a Shoestring Budget

If you would like to invest but think you don't have the money, think again. The beauty of investing is that unlike purchasing a car or even a home, it doesn't require a significant down payment. But most people know the old adage of paying yourself first is easier said than done. The cost of living, as well as the unplanned expenses that always seem to pop up, can make anyone feel that saving to invest is an uphill battle. But there surely must be a way to do it without putting a dent in your finances, right? Don't worry, we have you covered. Here are some thoughtful ways to put away extra cash without breaking the bank, which will provide you with the means to start investing.

Key Takeaways

  • Saving and investing is a commitment but it doesn't have to be painful. 
  • Consider signing up for an automatic savings plan and putting away bonuses and income tax refunds.
  • Do your research about 401(k) plans, including those sponsored by your employer.
  • Don't forget about new investment models like robo-advisors and real estate crowdfunding.

Anyone Can Save

Investing is great if you have plenty of extra money lying around. But what if you don't? A lot of us put off saving and investing because we may not think we have enough money or because retirement is too far away to think about. Others have a lot of debt to shoulder. If the latter is true for you, you may want to consider paying off your debt or at least putting a big dent in it.

If you have a lot of debt, you may want to consider paying it off or at least cutting it down significantly.

One of the things you need to have—other than money—is discipline. Saving and investing is a commitment, but it doesn't have to be painful. Start by making a budget and setting goals. Putting everything down on paper and visualizing it can help keep you on track. Once you have your income and monthly obligations down, you can figure out how much you can reasonably afford to set aside each month. Even if you have as little as $25 each month initially, it's better than nothing. Explore high-yield savings accounts, which earn significantly higher interest rates than regular savings plans.

Every Penny Counts

Consider an automatic savings plan, a savings program offered by many banks and financial institutions. One popular example is Bank of America's Keep the Change Program. The best thing about it is you don't have to do much, other than your routine banking. The bank rounds every purchase—usually made with your debit card—to the nearest dollar, depositing the change daily into your savings account for free. At the end of the year, you receive a statement letting you know how much you've saved. This may seem like a small step, but it's certainly a way to start or add to your investing pool.

Bonuses and Refunds

Another painless way to save is to invest any employee bonuses you receive throughout the year, as well as any tax refunds, instead of splurging. Since these are generally additional to regular earnings, you're less likely to feel the pinch if you put them away. It's a great way to add to your investment funds and one that will reward you down the road.

Loyalty programs and using credit cards that offer cash-back rewards are other tools that can further your savings goals. Since this is extra money that you're not actually earning from your job—meaning it won't affect your monthly budget if you put it aside—you may want to consider participating in these types of programs as well.

401(k) Plans: Take the Match if You Can

Participate in your employer's 401(k) plan, especially if it includes a match. Take time to read the descriptions of each investment the plan offers, figure out how much you can set aside from each paycheck, and determine your level of comfort with the various tiers of risk the plan's investments hold. Index funds are a good start for people who aren't familiar with the particulars of investing, and most, if not all, 401(k) plans offer them.

Researching your options is a critical step if you want to maximize your returns. Take time once a year to reassess your plan to ensure that your fund is meeting your investing goals. Don't forget to rebalance your investments. Past performance is a good predictor of the future, but remember, it's not always a guarantee.

Many financial websites have excellent resources to research the performance of individual stocks as well specific mutual funds. Keep in mind that a fund's performance is only one of many important parts of the equation. Watch out for excessive administrative fees.

In 2006, a flurry of lawsuits over 401(k) plan fees prompted an investigation by a congressional committee into fee disclosure. The Department of Labor offers useful information about the average cost of fees and a checklist you can use to evaluate your current plan.

No 401(k) Plan?

Approximately 57 million Americans work for employers that don't offer a 401(k) plan, but that doesn't mean those workers can't successfully save and invest on their own. Here are two good alternatives:

Exchange-traded funds (ETFs)

Exchange-traded funds (ETFs) are similar to mutual funds, except that while mutual funds' prices are set at the end of the trading day, ETFs trade like stocks and their values change based on each trade. For example, you can buy an ETF like the Standard & Poor's depository receipt (SPDR) Trust that attempts to mimic the performance of the S&P 500 without the hassle and costs associated with purchasing 500 individual stocks.

ETFs not only provide the opportunity to own a single investment that encompasses a large number of stocks but also offer the opportunity to diversify your portfolio. Like mutual funds, a variety of ETFs are available to match your investing goals. A number of financial websites contain readily available information the average investor can use to research ETFs and their performance simply by searching the ETF ticker symbol.

Choose your own mutual funds

For smaller investments, hundreds of mutual funds allow a small initial investment of $500 or less. Morningstar’s mutual fund screener reveals 200 different mutual funds that will accept a $500 minimum deposit.

Let a Robo-Advisor Invest for You

Robo-advisors, which are automated financial planning platforms that are driven by algorithms, were created to make investing as simple and accessible as possible. With little to no human contact, these companies collect your financial information and goals, offer advice, then invest your assets automatically, enabling you to pay lower fees.

These platforms can be especially helpful for those at the beginning of their journey to financial independence. The 2022 Investopedia Financial Literacy Survey found that Generation Z adults (i.e., those 18 to 25 years old) were more financially sophisticated than any prior generation was at their age. However, even though 26% of those surveyed were already invested in the stock market, only one-fourth of this group felt they understood the market well enough to explain it to someone else.

Discount Brokers

Once you're ready to invest, check out low-cost online brokers. A good place to start would be Investopedia's list of the best discount brokers.

Real Estate Crowdfunding

In the past, investing in real estate was a lofty ideal for the average investor—but not anymore. Real estate crowdfunding is a new style of investing that raises capital for real estate projects and investments via the Internet and social media outlets. When investors engage with a crowdfunding company, that company invests their cash in a series of real estate projects, including hotels, medical and care facilities, and condominiums. Many of these crowdfunding companies will accept low initial investments, allowing average investors to reap the rewards of owning real estate while cutting out the headaches and large expenses related to property ownership.

How Do I Start Investing on a Small Budget?

Saving and investing is a commitment that takes discipline, but it doesn't have to be painful. Start by making a budget and setting goals. Consider signing up for an automatic savings plan and putting away bonuses and income tax refunds. Research bank and credit card loyalty reward programs that enable customers to save small amounts that add up over time. Consider high-yield savings accounts as well as real estate crowdfunding, which don't require large monetary contributions. Also, hundreds of mutual funds allow a small initial investment of $500 or less.


How Can I Minimize Investing Fees?

Let robo-advisors invest for you. Robo-advisors are automated financial planning platforms that are driven by algorithms and were created to make investing as simple and accessible as possible. With little to no human contact, these companies collect your financial information and goals, offer advice, then invest your assets automatically, enabling you to pay lower fees.

Should I Participate in My Employer's 401(k) Plan?

Yes! Participate in your employer's 401(k) plan, especially if it includes a match. Take time to read the descriptions of each investment the plan offers, figure out how much you can set aside from each paycheck, and determine your level of comfort with the various tiers of risk the plan's investments hold. Index funds are a good start for people who aren't familiar with the particulars of investing and most, if not all, 401(k) plans offer them.

The Bottom Line

In his book Real Money, CNBC host and former hedge fund manager Jim Cramer stated that he started investing with only a few hundred dollars. The lesson here is that isn't the amount that matters—it's getting started. That said, using some of the tips in this article may give you an opportunity to turn pennies into shares in order to save for your retirement.

After all, great oak trees grow from small acorns and starting with even a small investment may allow you to grow your portfolio into something great as well. As a young investor, you have time on your side; so remember, starting early with a little bit may help you end up with a lot in the future.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
  1. Bank of America. "Keep the Change Savings Program."

  2. FINRA. "Investing in Your 401(k)."

  3. U.S. Government Accountability Office. "Changes Needed to Provide 401(k) Plan Participants and the Department of Labor Better Information on Fees; Recommendations."

  4. U.S. Department of Labor. "Retirement Plan Fee Disclosures."

  5. Georgetown University McCourt School of Public Policy. "What Are the Potential Benefits of Universal Access to Retirement Savings?"

  6. S&P Global. "SPIVA Results by Region: U.S."

  7. Morningstar. "Basic Fund Screener."

  8. James J. Cramer. "Jim Cramer's Real Money: Sane Investing in An Insane World," Page 8.

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