What stops many people from investing? Lack of knowledge is one reason, especially misconceptions about finance being `scary` or `unsafe`. But many people out there don’t have a lot of money, including many high-income people, due to their spending habits.
So what options exist for people who don’t have a lot of money? Here I run through a few options:
1). Monthly savings as opposed to lump sums
Investing a lump sum can be a fantastic and cost effective way of saving, however, often you need $5,000 or even $10,000 to make it worth it. This is because many fixed costs add up on small accounts. As an example, if you only have $1,000 and it costs $2 a month to upkeep all accounts plus trading fees of $15 every time you trade, you have already eaten into your small lump sum in a way that bigger investors haven’t. Regular contributions can make sense for people with limited resources, as you can often start with $100-$200 a month.
2). Invest into your employers plan
In America many firms have 401(k) and UK has auto-enrollment. Even investing 1% of your earnings will start to add up. Aim to gradually increase it.
3). Get your spending in order
One reason you may not have a lump sum is your spending habits. Utilize easy to implement ways to spend less such as using cash more often than cards, as research has shown we spend 2%-5% more if we use apps and cards. Giving over cash feels more painful.
4). Downsize or sell your home
There are countless people out there who are cash and asset poor, except having one big family home. Selling or downsizing that home could give you a huge lump sum. The lump sum could even be big enough to retire if you know the 4% rule.
5). Buy treasury securities until you have a bigger lump sum
Americans can buy Treasury Securities directly on the internet for as low as $100.It is also possible to buy Treasury Inflation Protected Securities, or TIPS. Treasuries won’t pay much and it makes sense to go into markets once you have enough money.
Apps like Acorn invest your spare change. Numerous other apps can help you plan your budget and good old fashioned practices like writing down a budget can help too, as writing something down obligates you to spend less.