Investing on a budget

Investing on a budget is not always easy. I know, because at times I’ve been on a very limited budget myself and have only been able to invest small amounts of money. But, over the long run I was able to make some money, so it was worth it to me. And I think more importantly, it got me in the habit of disciplined investing. Now I can’t imagine not investing! So I think that’s the real value in investing on a budget – even if you can only set aside $25 a month, if you do this consistently over time and increase it when you can, you’ll make money — assuming you invested wisely.

What is your goal?

The first step in determining how to invest your money is narrowing down what your goal is, or purpose for investing. Are you going to invest in one lump amount, or are you going to invest on a monthly basis over time? Also, is this something you are doing for the long term (5 years or longer), or is this money you may need in the near term, in less than 5 years, maybe for college, or emergencies or a downpayment on a house? If you already have plans for this money in the next 5 years, you probably don’t want to take too much risk (like buying individual stocks) because if the stocks you pick go down, you won’t have time to wait it out to see if they come back. This is also true for mutual funds or index funds. Even though stock funds don’t usually fall as much as individual stocks on a percentage basis, in a bad year some funds can fall 5%, 10%, or even more if it’s an unusually bad year. And it may take them a year or more before their performance improves. If you can’t afford to take that kind of loss within 5 years, or you can’t ride it out to see if it comes back, then you may want to stick with something safer, like bonds or even a money market account.

On the other hand, if you are investing for the long term maybe funds or stocks is something you would want to consider. Just as a fund can lose 10% in one year, it can also gain 10% in one year. It’s really all about timing – some years are good, and some years are not.

How to get started

When dealing with smaller amounts of money, fees start to become a huge factor in deciding where and how to invest. If you want to invest in individual stocks and only have $100, paying $15 or even $25 to execute a single trade makes absolutely no sense at all – a $25 fee on a $100 trade is 25%. (yes some brokers do charge that much). If you make a 10% return that year, you won’t even recover the fee you paid to make the investment. So I think you see where I am going with this – always pay attention to fees when opening an account.

Avoid account minimums and avoid paying fees!

Since I am a person who does not like to pay fees, i’ve done my research in this area and found two brokers that will allow you to open accounts with no minimum deposit. One allows you to buy mutual funds with no fees, and the other allows you to buy stocks online with no fee. You can find the details of these brokers on the Open an account page.

Note: If you want to buy individual bonds and you are in the US, you can do that through the government sponsored TreasuryDirect program.

Last Updated on Saturday, 28 March 2009 02:04