How to Start Investing Even If You’re Broke

Knowing how to start investing with just a little bit of money is the first step to building a financial future for yourself.

While returns are never guaranteed, historically S&P 500 — which measures the largest 500 public companies in America — has gone up an average of 10 percent a year, and 13.4 percent a year between 2013 and 2017.

Better yet, real estate can frequently pay you 15% or more on your money (called an “Internal Rate of Return” or IRR). Part of the reason for these amplified returns is that real estate allows you to use leverage (mortgages), because your debt obligations are backed by real assets.

Furthermore, tax liens can pay you 16% or more on your money. A great book that teaches this investing strategy is called The 16% Solution. In the book What the Rich Invest in, That the Poor and the Middle Class Do Not, this is one of the investment vehicles that is discussed. 

Furthermore, investing in yourself or your own business can often provide returns worth 100% to 1,000% over the course of your lifetime.

If you’re able to put away just a few dollars today, it will pay in great dividends over the years. Read on to learn how to start investing even if you’re broke.

How to Start Investing If You’re Broke

Before you start, you should try to build up an emergency fund. You need to have money, even if a small amount, to cover unexpected expenses. Otherwise, there’s no point investing your money, because you may have to withdraw it at some point in the future.

However, you can still “invest” with your emergency fund. Stick it in a high-interest savings account, which can earn around 2 percent interest a year. That way, even though you can always access your money, you’re learning on a small scale how to deploy your money and put it to work for you. This will also help to cancel out your losses from inflation each year.

While there’s a ton of informative finance books that you should check out, the most important literature you can read is your own bank statement. Knowing where you can cut costs and save money can help you build some capital to invest with.

It’s also a good idea to pay off any debt you may have. While some things — like mortgages and car payments — will be around for a while, it doesn’t make sense to accumulate interest on a personal loan or credit card. Often, the rate of interest is higher than what you’ll earn by investing your money, which means you’re losing money in total.

Investing Apps

Investing apps are a great way to get started in the investing game if you don’t have a huge amount to start with. Most investing apps have very low minimum balances, like Stash, which only requires a $5 deposit.

There are many different types of investing apps. Robin Hood, for example, is a trading app, while other apps, like Betterment and Wealthfront, are robo-advisors that pick your stocks for you.

Because of the low amount of money you’ll be investing, fees tend to be low. Stash only charges $1 a month for accounts under $5,000, WealthFront charges 0.25 percent, and other apps, like Robin Hood, don’t charge fees for trades at all.

Finally, you should look at apps that offer specific ways to save money automatically. For example, WealthSimple’s roundup feature will round any purchases with your credit or debit card up to the next dollar. At the end of the week, that deposit will go into your investment account.

This is a great way to grow your savings without actually changing any of your habits. Further, you won’t notice the difference between paying an extra few cents on each shopping trip.

Automatic Savings (Stacking Money to Invest)

One of the simplest ways to invest in your future is to make automatic contributions to savings account. Most banks will allow you to set up your account so that a percentage of each paycheck is deposited into a different account than you use for your day-to-day expenses.

Even a 1-percent contribution is significant over time, though you won’t likely miss it in your daily life. For example, if you make $1,000 a week, a 1-percent contribution every two weeks will be $20, or $520 a year. The “set it and forget it” approach means that you’ll be pleasantly surprised at your balance when you check it again in a few months.

While you may get some small returns on your money (compounding) from your bank, the importance of this approach is that it will let you systematically accumulate $5,000, $10,000, or more over time.

Later, you can push these funds into investment vehicles where you can get your money working for you, instead of the other way around!

Government Bonds

American government bonds are another low-cost investment vehicle that you can take advantage of. They are effectively loans you are giving the government, with a pre-determined repayment period and interest rate. The longer you hold the bond, the more money you make.

You buy them directly from the Treasury Department, through Treasury Direct. The minimum investment is $100, and the amount of time that you can hold the bond will vary depending on which type you choose.

Since bonds have a payout already determined, they can be a way to hedge your bets against shifts in the stock market. Further, the American government is unlikely to not repay its debts, so there’s very little risk involved.

Of course, this means that your potential earnings are limited, but it’s a good way to grow your money until you are in a financial position to take on a little more risk in your investments.

Real Estate Investing

Over most of history, the richest people have held real estate assets. There’s a reason for this. Real estate is an incredible vehicle for multiplying wealth, because real estate can produce monthly cash flow, increase your net worth, give you insane tax benefits, and importantly, provide you with protection against inflation.

Importantly, it’s not uncommon in real estate to get returns of 15% or more per year and sometimes much more. (Of course, financial losses are also possible in real estate, so read this article to learn more about getting started in real estate.)

For those that aren’t familiar with the Rule of 72, it is a “way to determine how long an investment will take to double given a fixed annual rate of interest.” By dividing 72 by the annual rate of return, investors can get an estimate of how many years it will take for the original investment to double.

Using the Rule of 72 with a 15% annual rate of return, your money would be doubling every 4.8 years (72 / 15 = 4.8).

This is incredibly powerful, because this means a 15% return would turn $100K of your money into $1.6 million in under 20 years. 

To show you how this compounding works, at a 15% rate of return:

• $100K would double to $200K by year 5
• $200K would double to $400K by year 10
• $400K would double to $800K by year 15
• $800K would double to $1.6 million by year 20

Start Investing As Soon As You Can

The real takeaway is that the best time to start investing was 20 years ago; the next best time is right now. Because average returns are quite high, even putting away just a few dollars a month can pay off over a long enough period of time. The above investment vehicles are great ways to get started.

While the list above contains a few of the simplest ways how to start investing if you don’t have a ton of extra cash, they’re not the only ways.

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