malty microbrewery: Investing on a Smaller Budget

Tuesday, January 24, 2012

Investing on a Smaller Budget

Don?t let your small budget keep you from taking advantage of the wealth building power of investing.

At the end of last week, I published a guest post about investing on a smaller budget. Some of the ideas presented were interesting ? but considered risky. Additionally, some of them require that you use leverage in your efforts to begin investing on a small budget. I received a couple of emailed requests asking for more ?practical? approaches to investing on a smaller budget.

First of all, if you can, invest in a tax advantaged retirement account. This is one of the best ways to maximize your money, and help you save for the future, since you aren?t bogged down as much by taxes. If you are interested in investing beyond your retirement account, though, here are some of my ideas for taking your smaller budget, and using it to good account as you begin investing:

Brokerage account: You can open an account with an online broker and begin investing with as little as $25 or $50. Most online brokerages have low account minimums, and you can invest a small amount of money each month. Make it automatic, with a direct debit from your checking account, and you will be investing each month without thinking about it. You can buy partial shares of individual stocks, as well as partial shares of index funds and ETFs.
DRIPs: There are a number of companies that offer DRIPs, allowing you to make the most of your investment dollars. You can usually start with a relatively small amount of money, and you can usually purchase partial shares. Many companies will let you set up an automatic plan that draws from your account each month to purchase new shares. Plus, when dividends are paid out, your money is automatically reinvested in the stock, boosting your holdings and helping you build your wealth automatically, a little at a time.
Treasury bonds: You can also use a small amount to start investing in Treasuries. You can open an account at Treasury Direct and purchase what many consider the safest investment around. Your returns will be lower, though, but you are likely to have a bit of a safety net.

These methods are less glamorous than investing in commodities or currencies, but they are considered less risky, and they don?t require a huge outlay of capital.

Increasing Your Investment

Of course, you shouldn?t keep your investment small over time. While it is important to get started with investing, you should also increase the amount you invest as your income increases. As you earn more money, increase what you are contributing. Don?t think that you are going to earn enough money to retire on if you stick with your original plan of investing $50 a month. That?s just not going to cut it. As your circumstances improve, you must take your investing up a notch. Just make sure to consider your asset allocation and rebalance occasionally to limit your risk, and improve your portfolio performance.