5 Strategies You Can Adopt If You're Investing on a Budget

The journey toward financial freedom and long-term wealth accumulation often begins with the simple act of investing, but many individuals are deterred from taking this crucial step as they believe they need substantial money first before they invest. However, even investors on a tight budget can take advantage of the numerous opportunities available in today's investment landscape. Potential investors can get started on a path of financial growth and security by investing consistently over time. Whether you have a modest income, limited savings, or are just starting out in your career, investing early, even a nominal amount, can help you take advantage of the power of compounding and achieve your long-term financial goals. Consider consulting with a professional financial advisor who can guide you effectively on investing strategies you can adopt based on your unique needs and goals.

This article explores 5 strategies you can adopt if you are investing on a budget and why low-budget investing matters.

How to invest on a budget

1. Start investing in low-cost index funds

When investing on a budget, low-cost index funds can be an excellent starting point. These funds track a specific market index, such as the S&P 500 or the Dow Jones Industrial Average, and aim to replicate its performance over time. Fund managers do not decide which securities to buy or sell in the fund; rather, they aim to hold all the investments in a specific index in the same proportions as the index itself. This is why index funds are considered a type of “passive” investing instead of “active” investing, where fund managers actively buy and sell securities trying to outperform the market.

There are several advantages to investing in low-cost index funds when you have a nominal budget. Firstly, they provide diversification by offering exposure to a broad range of securities, reducing the risk associated with investing in individual stocks. Additionally, index funds tend to have lower expense ratios compared to actively managed funds since they require less active management. This makes them a cost-effective option for budget-conscious investors.

Another benefit is the transparency offered by index funds. As an investor, you know exactly which assets are included in the index fund, providing clarity and understanding of your investments. Moreover, the inherent diversification in index funds can help lower market risk.

Lastly, when investing in low-cost index funds, you don't need an in-depth understanding of individual companies or spend significant time analysing financial statements. Instead, you can invest in a broad market index and potentially benefit from the market's overall growth. However, it is essential to note that low-cost index funds may not be suitable for everyone. You may consider investing in individual stocks or actively managed funds if you have a higher risk tolerance or prefer more active investment strategies.

Also see: How to Budget Using the 50-30-20 Rule

2. Explore the dollar-cost averaging (DCA) strategy

In simpler terms, dollar-cost averaging (DCA) is a strategy wherein a fixed amount is invested at regular intervals in an asset class, regardless of its price. This strategy is commonly applied to stocks or mutual funds. By investing regularly, such as on a weekly, monthly, or quarterly basis, investors can potentially benefit from market fluctuations.

In this strategy, you can buy more shares when prices are low but fewer shares when prices are high. Over time, this approach can result in owning more shares at a lower average cost per share than when making a large purchase at a potentially unfavourable time. The key to success with the DCA strategy is maintaining consistency by investing the same amount at each interval rather than attempting to time the market.

Suppose you have $1,000 to invest in a stock. Instead of investing the entire amount at once, you could opt to invest $100 per month for ten months. Doing so allows you to take advantage of market ups and downs, potentially building a profitable portfolio over time.

The DCA strategy appeals to budget-conscious investors because it allows them to invest small amounts of money regularly without worrying about timing the market. However, it's important to note that dollar-cost averaging does not guarantee profits or protection against losses. Markets can be unpredictable, and investments can fluctuate in value. It's crucial to do your research and choose quality investments with a solid track record.

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3. Invest in stocks that offer regular dividends

If you're looking for a way to build long-term wealth on a budget, dividend-paying stocks might be worth considering. These stocks offer a portion of the company's profits to its shareholders as a payout. Many large and established companies regularly pay dividends, providing a potentially reliable option for those seeking stable returns. Moreover, dividend-paying stocks typically have a long history of generating steady earnings and a strong financial position, making them a potentially less risky investment option than other, more volatile stocks.

For instance, if you have 200 shares of a listed company, and the company declares a dividend of $3, you earn $600 in dividends alone (depending on the dividend cycle of the company). You can reinvest the dividends to buy more shares, potentially boosting your returns.

However, it's important to note that dividend payouts are not a compulsion for companies. Some companies may have unsustainable dividend payments, while others may modify their dividend with every payout. Therefore, before investing, thoroughly research the company's financials and dividend history.

4. Leverage fractional shares

Fractional investing is a relatively new investment strategy that has made it easier for budget-conscious investors to invest in high-priced equity and other securities. With fractional investing, you can buy and sell fractional shares of stocks, which means that you can invest small amounts of money in companies that earlier would not fit your budget. The appeal of fractional investing lies in the fact that it allows you to diversify your portfolio by investing in a wide range of stocks and ETFs, which can potentially reduce risk and increase potential returns. You can invest in various companies and sectors, depending on your investment goals and risk tolerance.

For example, let's say you're interested in buying shares of Amazon, but the current price per share is over $3,000. With fractional investing, you can buy a fraction of a share of Amazon for as little as $1, making it possible to invest in this high-priced stock with just a small amount of money.

Fractional shares work through a straightforward process facilitated by brokerage platforms that offer this service. Here's how it works:

• Select the stock: First, you would select the stock you want to invest in. This could be a high-priced stock like Amazon, Alphabet, Apple, or any publicly traded company.
• Decide your investment amount: Rather than purchasing an entire share, you decide the amount of money you want to invest in that stock. This could be as little as a few dollars.
• Purchase the fractional share: When you make your purchase, the brokerage will allocate you the corresponding fraction of a share. For example, if a share costs $1,000 and you invest $100, you would receive 0.1 of a share.
• Owning and earning from the share: Once you own a fractional share, it behaves just like a regular share. If the share price increases, the value of your fractional share also increases. Similarly, if the company pays a dividend, you'll receive your proportionate dividend.
• Selling fractional shares: You can sell your fractional shares anytime, just like regular shares. The sell order is also executed in terms of value rather than the number of shares.

It's important to note that fractional investing has its own risks. As with any investment, there is the potential for market volatility and potential loss of investment.

Also see: 5 Key Tips to Get Your Personal Finance Organized

5. Consider consulting a robo-advisor

A robo-advisor is a digital platform driven by algorithms that offers automated financial planning services with minimal human supervision. Robo-advisors usually gather information about the client's financial situation and risk tolerance through an online questionnaire. Based on the responses, the robo-advisor uses an algorithm to determine an optimal investment portfolio for the client. For instance, the robo advisor may suggest a diversified portfolio of low-cost index funds or ETFs for low-risk appetite clients.

Once the portfolio is set up, the robo-advisor manages it automatically. This includes rebalancing the portfolio to maintain a certain asset allocation vis-a-vis stocks and debt and reinvesting dividends.

Using a robo-advisor can be a smart way to invest small amounts of money for many reasons:  

• They have low fees: Robo-advisors usually charge lower fees than traditional human financial advisors as they can scale their services to meet the needs of several clients due to automation. Generally, robo-advisors charge a 0.5% flat fee per year per specific amount managed.
• They offer accessibility: Robo-advisors are accessible 24/7, and you can view and manage your account whenever you want.
• You can invest a lower investment amount: Many robo-advisors have low or no account minimums, making them accessible to investors with limited funds.

 

Why low-budget investing matters

Investing on a low budget may appear insignificant at first, however, the size of your investment doesn't matter as much as the act of investing itself. Whether your aspirations include saving for retirement, purchasing a home, or starting a business, regularly investing small amounts of money can potentially bring you closer to your financial goals. Investing on a budget helps cultivate discipline, patience, and a long-term perspective on wealth building. Further, when you invest regularly, you become more conscious of your financial decisions, market environment and more resilient in the face of market fluctuations. These attributes contribute to your investment success and extend to other areas of your financial life.

Low-budget investing also presents an opportunity for learning and experimentation. With smaller amounts of money at stake, you can explore different investment options, diversify your portfolio, and gain valuable experience in the world of finance. As you grow more comfortable and knowledgeable, you can gradually increase your investment amounts and make more informed decisions. Suppose you're 25 and aim to retire at 65 with a substantial nest egg of $1 million. By investing just $100 per month in a low-cost index fund with an average annual return of 7%, you could accumulate over $200,000 in retirement savings by the time you reach 65. Moreover, by increasing your contributions to $200 per month, you could potentially amass over $400,000 in retirement savings.

You do not need to save a hefty amount each month to build a substantial retirement corpus. You can even save for retirement on a shoestring budget by starting early and maintaining a regular investment routine. By doing so, you can potentially take advantage of compounding returns. This phenomenon allows your investments to grow at an accelerated pace, increasing your overall wealth over time.

To conclude

Investing is not solely determined by the amount of money you have to invest but rather by the commitment and dedication to take that first step. From investing in low-cost index funds to leveraging the power of automated investing, low-cost investing strategies can help you make smart investment decisions while keeping your financial goals in sight. By adopting low-budget investing strategies, you can set yourself on a path toward financial growth, wealth accumulation, and a brighter financial future.

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