Investing

Start Investing Now, Even on a Small Budget

Written By: Katie Brenneman
Reviewed by: Mike Reyes
Last Updated October 4, 2023
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Few people don’t dream of making at least a little more money. It can help ease some of the pressure, open up lifestyle opportunities, and help you achieve a level of comfort, particularly as you edge toward retirement. Aside from working longer hours or getting a higher-paid job, one of the ways to achieve this is to make strategic investments. But what do you do if your household budget is already stretched pretty tight, even without investing? Well, the good news is that having a small amount of capital at your disposal doesn’t exclude you from making investments. With a little planning and information, you can focus the small amount of available capital in ways that may result in long-term gains. 

1. Taking Stock of Your Motivations

a person stacking coins on top of a table

It’s not unusual to feel hesitant about investing. Particularly when you’re on a limited budget, every cent counts, doesn’t it? It’s tempting to think about how to gain immediate value from what you earn, rather than place money in something that might benefit you years or even decades down the line. Therefore, it’s important to take stock of your motivations for investing.

Some of the motivations can include:

Protecting against financial instability

First and foremost, most people don’t want to work for the rest of their lives. Even when you really enjoy your job, you’re likely to have a finite number of productive years available to work. Aside from the prospect of retirement, uncertain economic conditions might make unemployment a possibility in the future. One of the tools you have available to use to protect yourself from financial instability is investment. By just starting to invest a little of your budget, you can put yourself in a position to have some kind of buffer for the future.

Mental wellness

Financial problems can negatively impact your mental health. Indeed, money is considered one of the primary causes of stress, potentially leading to unhealthy thoughts, feelings, and behaviors. You can mitigate the psychological, emotional, and physical issues by taking steps such as avoiding lifestyle creep — spending more as you earn more, rather than saving back — and budgeting for unexpected expenses like medical bills. However, making responsible investments can also play a role in helping reduce stress related to money, thereby bolstering mental wellness.

Improving quality of life

Money isn’t everything, right? But it can certainly make a difference to your quality of life. When you’re on a limited budget, it can be difficult to justify expenditures that can give at little — but nonetheless powerful — boost to your day-to-day living. This might include taking vacations that enrich you, making improvements to your home, and leveling up your education, among other things. Investing, even just a little bit to begin with, can start to provide you with the capital to put toward these quality-of-life improvements.

2. Adopting a Better Money Mindset

Taking that leap into investing in a responsible way can require a shift in the way you think. Some money mindsets are healthier than others. For instance, some people will obsess over their finances to the point that it’s stressful and not conducive to making reasonable changes. While other people ignore their finances to the detriment of their stability. It’s important to strive for a balanced money mindset that enables you to be reasonable and realistic about your finances while also allowing you space to take informed risks. 

When you’re looking at what makes a positive money mindset, it’s helpful to understand that it begins with a sense of curiosity about finances. This enables you to both gain a better understanding of your current situation and identify the investing opportunities that are available to you, even on a budget. Another hallmark is recognizing that gains don’t necessarily come quickly. Understanding that investments are long-term can enable you to make more mindful investments rather than take unnecessary risks by putting your small budget toward apparently fast returns. You must be patient to make the most gains with little money.

Certainly, not everyone’s at the point at which they have a positive money mindset immediately. Therefore, you should start to take steps that help you understand and improve your mental financial position. This involves spending time examining your relationship with money, what the negative issues are, and what in your life influences these. Look at what your current financial goals are — or make some if you haven’t already — and what components of your behavior or thought processes are standing in the way of these. This can give you a good foundation to make meaningful changes.

3. Freeing Up More Money

100 US Dollar Banknotes

It can’t really be overstated that having a tight budget doesn’t necessarily exclude you from starting to invest. The idea that only the wealthy can afford to invest is a harmful and inaccurate myth that should be ignored. That said, the more money you can invest, the greater the potential for returns. It’s not always easy to put cash into investments when there are many other things it could go toward. This is why it’s vital to take the time to find methods to free up more money.

You can begin by adopting budget-friendly money-saving measures. Even small adjustments here can have a cumulative impact on your available finances. This begins with making and sticking to a strict weekly or monthly budget. This provides you with a picture of your finances that makes it easier to identify areas for potential savings. It’s fine to dine out occasionally, but you should reduce this impact by looking for discounts and meal deals. There’s also money to be saved with smarter grocery shopping habits. Buying in bulk can yield savings while providing components to make and freeze quick meals in advance.

Another important way to free up money for investments is to be stricter about using bonuses and tax refunds. It’s tempting to think of this as “free money” that you can put toward slightly frivolous things. While enjoying your money is great, you can have a more positive and longer-term impact by dedicating at least the majority of these to paying off any debts and placing them directly into an investment fund.

4. Identifying Effective Opportunities

White Printer Paper

It’s important to understand that not all investments are right for everyone. Everyone’s situations and goals are different. Many decisions go into making an investment, from the potential for yield to the ethics of the companies you’re investing in. Certainly, when you’re on a small budget, it’s important to identify the investment opportunities that tend to mesh most effectively with a smaller budget.

Some of the options to consider here may include:

Savings and retirement accounts 

Savings accounts are among the most accessible investing opportunities for those on a budget. Employer-matched 401(k) plans may be a great way to maximize the amount you can put in the plan and boost returns. However, it’s important to work with the workplace human resources (HR) or accounts personnel to fully understand the different options and levels of risk at play and perhaps even gain independent financial advice before committing. 

But what do you do if you don’t qualify for a 401(k) or want to take a more independent approach? A Roth individual retirement account (IRA) can be a solid long-term plan. These accounts can be opened without an employer, and because you dedicate post-tax dollars to it, all eventual withdrawals are tax-free. These are particularly good for those on a low budget as access to these accounts is limited to those earning less than $153,000, and you can usually dedicate as little or as much as you like up to $6000 per year.

Mutual and exchange-traded funds

Beyond savings and retirement accounts, other potential sources of investment on a low budget are mutual and exchange-traded funds. In essence, mutual funds are ready-made portfolios that are already composed of a diverse range of stocks, bonds, and other assets. These funds may be based on stocks from certain industries or asset types to give investors the ability to focus on areas they have specific interests. Fund managers build the portfolios, pick the stocks, and handle the running of them, which is great for those who don’t have experience with investing in stocks. Importantly, there is a relatively low gateway to investment, with the minimum usually being $500.

Exchange-traded funds are similar in nature to mutual funds. The main difference is that you can purchase these funds — composed of diverse stocks — on the stock exchange in the same way that individual stocks can be bought. This can give investors on smaller budgets the opportunity to further diversify their portfolios with different types of funds. Again, the buy-in is usually lower, at around $500.

Not only can you gain profits from buying these items low and selling higher, but many also provide regular dividends to investors. However, it’s important to recognize that buying in at a low value tends to mean fairly low dividends for some time.

5. Reinvesting and Taking Greater Control

Close-up Photogrpahy Ship Captains Control

Making a single investment into a fund or other plan doesn’t have to be the limit of your activities as a low-budget investor. It’s certainly a great start and can help build a portfolio that, in time, offers greater financial security. Nevertheless, there are ways you can take greater control over the growth of your investments, potentially resulting in greater yields. One of these is reinvestment.

It can be tempting to gain dividends from funds or profits from stock sales and just spend these. This is fine, to an extent, but it’s worth considering how you can make the profit work harder to improve outcomes. Plan to take a proportion — if not all — of the money made from sales or dividends and place them back into strategic investment opportunities.

This doesn’t have to be solely directed toward the same types of funds the profits were gained from. Indeed, by reinvesting in a more diverse range of investments, you may find that your funds have greater resilience to fluctuating markets and economic downturns.

Some of the places to diversify into may include:

  • Real estate. This can take the form of buying properties to flip or buying to rent in order to gain regular passive income.
  • Micro-investing. Now, apps enable investors to buy fractions of stocks for small amounts of money. This can be a way to diversify more widely while keeping loss risks relatively low.
  • Different fund categories. Sometimes, the important thing is different than the number of investments you have but rather that you have various different kinds of investments. Therefore, you can choose mutual funds or exchange-traded funds that focus on different industries and types of assets.

Conclusion

The ability to start investing doesn’t have to depend on having a lot of budget. Indeed, you can extend the amount you have available to invest by making mindful budget and lifestyle choices. Nevertheless, almost no matter how much cash you have, options are available. It’s well worth exploring these, whether it’s a 401(k) that helps you save for the future or mutual funds that provide regular dividends. It’s important to remember, though, that investment is rarely — if ever — a quick route to profit. You must prioritize patience, stay educated about your investments, and make balanced choices to give yourself the best chance at financial stability and, perhaps, independence.

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