Investors don’t need hundreds of thousands of dollars to start investing. In fact, even small income earners can make profits through investments. The key to successful investing lies in discipline and adequate knowledge of the financial and investment market.
So how to start investing on a low income? Check out the following investment guide for people with little money.
Pay off Consumer Debts First
Most investment advisers will highly recommend paying off consumer debts such as car loans, credit cards and overdrafts first. It makes no financial sense for someone to earn 5% of interest in cash investments like a fixed-term deposit when he has to pay 18% on his credit card. As a general rule, make sure consumer debts are less than 15% of take-home salary before starting on any investment scheme.
Start Saving Early and Regularly
Everyone should start saving early and regularly to make the best of compounding interest. If a bank account holder re-invests his interest payment each year instead of spending it all, he will earn interest on both the principal amount and the previous year’s interest. Over the course of a few years, the amount will snowball into a sizable figure. And that can be used as a capital to invest in bigger investment schemes. For this reason, children and young working adults should be encouraged to start saving and investing early.
Buy Units in Managed Funds
Buying shares for the long term is a good investment strategy. But for those on a low income, buying units in property and share-based managed funds is an ideal option. Try to save an initial $500 to $1000 and buy units in a managed fund. Then make monthly contributions to build up the portfolio. When there is a more substantial amount – $10,000 to $15,000 – consider buying shares directly. However, be sure to do some market research or get professional money advice first.
There are other advantages of buying units in managed funds as well. The investments are managed by experienced fund managers who diversity the assets across different sectors, reducing the risks involved while ensuring good returns.
Open a Cash Management Trust
This is another approach to use before investing in the stock market directly. Typically, an initial deposit of $1000 to $5000 will be required. While the money in the cash management trust is waiting to be invested in future shares, it will earn a higher interest rate compared to a standard bank account. Cash management trusts are also very useful for those saving for a home deposit.
Borrow to Invest
While borrowing money to pay for consumer goods (for example getting a personal loan for overseas holiday and excessive use of credit card) is frowned on, borrowing to boost investments is often deemed a sensible financial move. The term “installment gearing” refers to investing in approved managed funds regularly using the investor’s own money and money borrowed from a margin lending facility.
For instance, a new investor starts with an initial investment of $1000 in a managed fund and this is matched by another $1000 from the margin lender. After that, the investor can make a minimum monthly contribution of as little as $250 per month. And again the contribution is matched by the lender. Over time, the investor will enjoy twice as much the profit, bearing in mind that he has to pay back the loans, of course.
It is possible to start investing on low income. Having the right money attitude, discipline and knowledge is crucial. Investment tips for people with little money also include paying off consumer debts first, saving and investing early, buying units in managed funds, using a cash management trust and borrowing to invest.
Found this article useful? Read also The Basics of Investments, Investing for Beginners and How to Invest Money Smartly.
References:
Power, Trish and Drury, Barbara. Investing for Australians All-in-On for Dummies. Queensland: Wiley Publishing, 2008.
Koch, David. Kochie’s Guide to Keeping it Real. New South Wales: Pier 9, 2006.
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