Is investing with a limited budget mission impossible?
If you don’t earn the kind of income you need to build savings, or if you’ve lost your job due to the Covid crisis, you might think investing isn’t for you.
Investing, contrary to popular belief, isn’t just for the wealthy. In fact, this is a common misconception we’re keen to address. No matter what your financial goals are, or how limited your budget is, investing your money is still one of the best ways to earn a return in the long run. When it comes to investing, there’s no need to wait until you have a certain amount of money set aside—there’s no better time to start than the present!
Here are a few key tips for investing when you have limited means.
1. Decide on a budget for investments
Many people make the mistake of deciding to invest whatever money they have left at the end of the month (if there is any). With this approach, it’s almost impossible to predict how much money you’ll be able to devote to your investments, and you may not end up investing at all. A better strategy is to take stock of your finances and determine a suitable budget to start investing. This budget can be weekly, monthly, semi-annual, etc. The important thing is that it’s in proportion to your income.
For example, if you have a stable salary, you can set up recurring, automated transfers. This way, a predetermined amount, say, $75 dollars from each paycheck gets invested. Think of it as an essential expense like paying a bill.
If you aren’t employed, but you still receive income (unemployment benefits, etc.), you can use the same approach, but adapt the amount you set aside in proportion to your income. Ultimately, the goal is to be able to invest without cutting back on your essential expenses. Keep in mind that you can start investing with as little as $20 a month.
Speaking of monthly budgets, this brings us to our next tip.
2. Track down any unnecessary expenses
Minor expenses really do add up. From online monthly subscriptions to food delivery, coffee, and the latest trendy smartphone, many expenses are unnecessary and can cut into your budget for investments. Conducting an audit to identify what you can reduce might be tedious, but it’s critical. Get honest about what you truly don’t need—be it new clothes or eating out—and you’ll be able to figure out how much you can realistically put aside each month. You might only have a few extra dollars to invest, but in the long run, those few dollars make a big difference.
3. Bet on Exchange-Trade Funds (ETFs)
Buying stocks can be expensive. This is why exchange-traded funds (ETFs) are an easy and affordable way to get started. An ETF is a collection of stocks and/or bonds. You can buy an ETF just as you would stock. However, when you buy stock, you’re investing in one company, such as Tim Hortons or Amazon. When you invest in an ETF, you’re investing in multiple stocks or bonds that follow a specific investment strategy. For example, some ETFs may track a stock index (like the FTSE Canada Index ETF, which invests in the largest Canadian stocks). Or, an ETF may track an index for a particular industry, such as technology or healthcare. By investing in ETFs, you can effortlessly benefit from the performance of all the companies involved.
4. Be confident in your ability to invest
A final key tip for investing on a small budget is to have confidence in yourself. It’s tempting to give up before trying, especially when resources are limited, and your idea of a successful investor is a professional in a suit who studies the markets every day. Remind yourself that investing is for everyone, and that you can invest as little as a dollar. What matters above all is your long-term investment vision. The longer the term, the more likely your money will grow.
At the core, investing is all about one thing: letting your money work for you!