How to Invest on a Tight Budget
When you first hear the word “investment,” your mind probably goes straight to Wall Street and the 20-year-old dudes in overpriced suits shouting buy and sell orders over a throng of equally loud and well-dressed 20-somethings.
But there is a lot more to the world of investing than simply playing the stock market. For example, anyone who is a homeowner has already made an investment in an asset that is practically guaranteed to pay off (and hopefully show a significant return) down the road.
You can also invest in bonds, mutual funds, and CDs as part of a balanced portfolio. Some people even invest directly in retail stores, farms, or other types of business (their own or others). And if you are looking to invest safely in your future, contributing to a 401K, Roth IRA, or some other type of investment fund is a good idea.
Okay, by now you might be getting a little overwhelmed by the sheer number of possibilities. But, what if you’re on a budget and you simply don’t have a lot of money to play with? In this case, there are a few guidelines you will probably want to follow to ensure that your money is invested both safely and wisely.
Things to Consider When Investing on a Tight Budget
The first rule, and this is of the hard and fast variety, is never invest more than you can afford to lose. Consider that to varying degrees, investments are like gambling. There’s a chance you’ll win, and you can definitely do your homework and hedge your bets, but if you’re putting up your mortgage payment or the kids’ college funds (in other words, money that you really can’t afford to lose) you need to be aware that there is a chance you won’t get it back.
The next thing you should consider is the speed and size of return you want to see. High-risk stocks can come with swift rewards, but you could lose your shirt just as easily. Money put into CDs, on the other hand, will show only a minor return (within a selected time, between 6 months and 5 years), but it’s fairly safe.
However, if you’re willing to wait until the age of retirement, your best option for investing on a tight budget is to contribute to a retirement account. If your employer offers a 401K, this is a good option (especially if they have a matching program). If not, you should consider starting a Roth IRA. There are two good reasons to go this route rather than, say, stocks and bonds, united rare coins gold, or commodities.
For one thing, any money you contribute to such an account is considered pre-taxable income. So if you put money into a Roth IRA, you can deduct it on your income tax. The other benefit is that retirement accounts use compound interest, which means you have the potential to earn a lot more over time than other types of accounts. Plus, retirement accounts are generally invested in a variety of low-risk stocks, bonds, and mutual funds, and there tends to be strict oversight.
So if you’ve only got a small amount of money to invest, put it into your future. It’s the best way to make your money work for you.
Filed under: Investing
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