Investing when you don’t have a lot of extra cash

Do you want to get started with an investment plan but after all the bills are paid each month, you don’t have a lot of extra cash? Even if you don’t have a lot of money, you can get started.

Before you get started, I have one word of advice. Make sure that you have paid off debt (with the exception of mortgages and car loans) before you start investing. It is very difficult to earn as much or more on your investments than you are paying in interest on your debt.

When I started investing, I didn’t have very much money. In fact it was difficult to commit to investing $25 per month. But, the sacrifices were worth it. If I had spent $25 on a new outfit or a night out 15 years ago, I probably would not have any memory of where that $25 went today. On the other hand, that $25 I invested fifteen years ago is now worth about $53. With the effect of compounding interest, time is your friend. If you took $1000 and never added any new money to it, you would have about $4467 after 30 years at 5% interest. When I started; US Savings Bonds (EE bonds) were just about the only investment vehicle that was available to me because I had such limited funds. I bought one bond each month; the bonds had a face value of $50 and cost $25. They have matured but are still earning interest so they are worth more than $50 each today.

The average return from the US stock market has been a little over 10% per year since 1926. Now this is an average, some years have delivered higher returns and others much lower returns. Individual stocks deliver very varied returns as well. Some are money losers and others have delivered huge gains. If we all had a crystal ball, picking the right stock would be easy (wouldn’t it be great to find the next Google, Berkshire Hathaway or Microsoft?). Unfortunately, picking the right stock is a lot like gambling. But, you can research stocks and mutual funds and make an educated investment.

If I were starting out today and had $100 per month that I could invest, I would probably sign up for an automatic investment plan and invest in stocks or mutual funds. Buying stocks with little money wasn’t an option when I was starting out; the fees to buy and sell were higher. Nowadays, services like ShareBuilder ( allow you invest very little money and pay very low commissions (as low as $4). If you are just starting out or need a way to be more disciplined about investing, you might consider signing up for an automatic investment plan.

The interest on US savings bonds is pretty low right now but it is a very low risk investment. US savings bonds are easy to buy as well. The government has a web site where you can learn more about US savings bonds and buy them online. Many local banks sell US Savings Bonds as well.

Also, you should be sure to participate in your company’s 401k program (if they offer one). If your employer offers a matching program, make sure that you are contributing the max you can to get the full matching benefit. The matching portion is like finding free money. A good thing about 401k plans is that your contributions are all made with pre-tax dollars so if you are in a 25% tax bracket, you will be $25 ahead of the game for every $100 you invest. In other words if you were investing with after tax dollars that $100 in pre-tax money would only be worth $75. When I have worked for employers with 401k plans, I really didn’t miss the money that was taken out of my paycheck and diverted to my 401k. I have however really appreciated how the money has grown thanks to the compounding effects of interest.

If your employer does not offer a 401k plan, open an IRA or Roth IRA on your own and have a set amount transferred to it each month. Depending on your age and tax bracket, a Roth IRA seems like a pretty good deal. You contribute after tax dollars now and do not have to pay tax on the gain when you start withdrawing it when you reach age 59 1/2.

I am not an investment professional, this information is based upon my experience. I strongly recommend as with any investment, that you research it fully before you invest any of your money.

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