How To Invest On A Shoestring Budget
If you would like to invest but think you don't have the money, think again. The beauty of investing is that unlike purchasing a car or even a home, it doesn't require a significant down payment. Most people know the " pay yourself first " mantra is easier said than done. The cost of living, as well as the unplanned expenses that always seem to pop up, can make any person feel that saving to invest is an uphill battle - if not a futile one. Here are some thoughtful ways to put away extra cash without breaking the bank, which will provide you with the opportunity to start investing.
Saving Is so Easy, Anyone Can Do It
Investing is great if you have plenty of extra money lying around, but what if you don't? Saving and investing is a commitment, but it doesn't have to be painful. Bank of America's " Keep the Change Program " is a small but meaningful way to start or to add to your investing pool. It works as an automatic savings plan, rounding every purchase to the nearest dollar, depositing the change daily into your savings account for free.
Aside from matching a small portion of your savings, Bank of America also sends you a statement at the end of the year, letting you know how much you've saved. Another painless way to save is to use any employee bonuses you receive throughout the year as well as any tax refund for investing instead of splurging. It's a great way to add to your investment funds and one that will reward you down the road.
401(k) Plans: Invest but Beware
Participate in your employer's 401(k) plan. especially if it includes a match, but proceed with caution. Take time to be an intelligent investor and read the prospectus. If your 401(k) hasn't beaten the S&P 500 's rate of return. then you might be better off investing on your own.
It is startling to discover the number of mutual funds that have not consistently beaten the S&P 500 (essentially an index of the 500 largest companies in America). Researching your various options takes only a few minutes, but it is of critical importance in maximizing your returns. Take time once a year to reassess your plan to ensure that your fund meets your investing goals. Past performance is a good predictor of the future but it's not a guarantee.
Many financial websites have some excellent resources where not only can you look up the performance of an individual stock, but you can also look up the performance of mutual funds. Keep in mind that a fund's performance is only one important part of the equation. Watch out for excessive administrative fees.
In 2006, a flurry of lawsuits over 401(k) plan fees prompted an investigation by a congressional committee into fee disclosure. The
Department of Labor offers useful information about the average cost of fees and a checklist you can use to evaluate your current plan.
No 401(k) Plan?
More than 25 million Americans work for small employers that offer no 401(k) plan, but that doesn't mean they can't successfully save and invest on their own. Here are two good alternatives:
- Exchange Traded Funds
If the idea of picking your own stocks is scary to you and you don't have the funds to hire an investment advisor, don't worry, there is a solution. You can purchase specific exchange traded funds (ETFs), which are similar to index mutual funds but are traded more like a stock.
This is important, because during the 1990s the S&P 500 provided an annualized return of 17.3%, compared with just 13.9% for the average diversified mutual fund. Therefore, instead of purchasing all 500 stocks on your own, you can purchase an ETF (like the SPDR Trust) that attempts to mimic the performance of the S&P 500 without the hassle and costs that come with purchasing 500 individual stocks.
ETFs not only provide the opportunity to own a single investment that encompasses a large number of stocks, but it also provides diversification. There are many choices of ETFs, just like mutual funds, so it should be easier to find an ETF that represents the market goals you're looking for.
Researching various ETFs and their performance is easy to do with the number of financial websites available to the average investor. You can search each ETF by entering the ticker symbol, and the information will be readily available to you in bite-sized pieces.
Once you're ready to invest, check out low-cost online brokers like Sharebuilder.com. This company offers automatic investing plans, individual one-time stock trades and a money market account with competitive rates. Best of all, Sharebuilder has no minimum investment, allows you to invest any amount and does not charge fees for inactivity.
The Bottom Line
With a bit of effort and diligence, you can invest and do so successfully. Famed investor and hedge fund manager Jim Cramer stated in his book, "Real Money" that he started investing with only a few hundred dollars. It isn't the amount that matters; it's just getting started. That said, using some of the tips in this article could give you an opportunity to turn pennies into shares in order to save for your retirement.
After all, great oak trees grow from small acorns, and starting even with a small investment will allow you to grow your portfolio into something great as well. As a young investor, you have time on your side, so remember to start early with a little to end up with a lot in the future.Source: www.investopedia.com