Laura answers a listener's question about building wealth when you have a fixed income or little money to invest.
Laura answers a listener's question about building wealth when you have a fixed income or little money to invest.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
Have a money question? Send an email to money@quickanddirtytips.com or leave a voicemail at 302-365-0308.
Find Money Girl on Facebook and Twitter, or subscribe to the newsletter for more personal finance tips.
Money Girl is a part of Quick and Dirty Tips.
Links:
https://www.quickanddirtytips.com/
https://www.quickanddirtytips.com/money-girl-newsletter
https://www.facebook.com/MoneyGirlQDT
https://twitter.com/LauraAdams
Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today's topic comes from an anonymous voicemail caller who says:
"I want you to create a show about how people on a fixed income can invest the little money they have. What can they do to get richer?"
That's a great question because many people struggle to start investing, especially when they have a fixed or low income that stretches their budget. This post will review building wealth and investing confidently, even with little money.
Thanks for downloading episode 893 of the Money Girl podcast! I'm Laura Adams, an award-winning author, money speaker, on-camera spokesperson, and consumer advocate.
You can learn more at LauraDAdams.com and contact me about PR and marketing work or speaking appearances! That's also where you can sign up for my free Substack newsletter, The Money Stack, which gives subscribers a terrific Money Success Toolkit.
If you have a question about money, use my contact page at LauraDAdams.com or leave a message 24/7 at 302-364-0308.
Why should you invest money?
If you're new to investing or know you need to invest more to achieve your financial goals, let's start by reviewing who should be an investor and why. While we use the terms saving and investing interchangeably, they're not the same.
Saving is putting cash in a safe, liquid account, like bank savings, for short-term needs, like unexpected expenses or something you plan to buy in a year or two. Investing is purchasing assets or financial instruments, like index funds or exchange-traded funds (ETFs), with the expectation of future growth over the long term.
Keeping emergency money in an FDIC-insured, high-interest savings account is critical, so it's never at risk and is available when needed. In other words, you should never invest your savings because many investments fluctuate wildly within short periods.
Generally, you should only invest when you plan to own the investment for several years, such as at least five or more.
The problem with keeping too much in savings is that it typically doesn't outpace inflation. For instance, if the inflation rate is 4% and your savings earn 1.5%, you're losing money and not building wealth. Your savings will be worth less in the long run if it grows slower than inflation.
If you want the opportunity to beat inflation, investing in the financial markets is a popular option because it takes little money, can be well-diversified, and is convenient for average investors.
READ ALSO: Am I saving enough for retirement?
5 ways to invest confidently with little money
There's a misconception that people with fixed incomes or little money can't invest in the financial markets. Fortunately, most investing firms and online platforms have no account minimums, allowing you to buy fractional shares of expensive publicly traded stocks like Amazon and Apple.
In other words, you can own a fraction of the world's most profitable companies by purchasing shares of one or more ETFs or index funds. I'll discuss funds more in a moment.
Here are five ways to confidently invest even when you have a fixed income or little money to set aside.
1. Build healthy savings.
Whether you have a fixed income because you're disabled, retired, or for any other reason, you still need a cash reserve. Therefore, if you don't have enough savings, prioritize building it before investing.
A good savings target is three months' worth of your living expenses (such as housing, food, utilities, and debt payments). For example, if your living expenses total $3,000 each month, make a goal to build up at least that amount and, ideally, $9,000 in savings.
In addition, if you have high-interest credit card debt, consider paying it off as soon as possible. By doing that, you'll get an instant rate of return by eliminating the high monthly interest expense.
2. Purchase a diversified portfolio.
For the average investor, buying and selling individual securities, such as stocks, isn't wise because they can be volatile, rising and falling throughout the day. A better strategy is investing in one or more diversified funds, which bundle investments, such as stocks, bonds, and other securities.
Funds are usually made up of hundreds or thousands of underlying securities. If some lose value, others will hold steady or increase in value, minimizing potential losses and allowing you to earn higher average returns.
If you have decades to go before you plan to spend invested money, consider putting a majority of your portfolio in a stock fund. You might choose an S&P 500 index fund, which tracks the performance of the 500 largest companies in the U.S. Since the 1920s, the historical average return of the stock market has been approximately 10%.
If you're already retired or living on a fixed income, the same benefits of diversification apply. However, depending on your time horizon, age, and risk tolerance, you might own a fund with a mix of stocks, bonds, and cash, to balance growth and risk.
LISTEN ALSO: Investment portfolio rebalancing–what is it and why it's critical
3. Use tax-advantaged accounts.
When you purchase investments inside a tax-advantaged account, like an individual retirement account (IRA), workplace 401(k), or a health savings account (HSA) you get terrific money-saving tax benefits.
Workplace retirement plans may offer valuable matching contributions from your employer. But even if you don't get a match, try filling those accounts first. For 2025, you can contribute up to $23,500 or $31,000 if you're over 50 to most workplace retirement plans.
Your elected contributions can be a flat amount or a percentage of your paycheck and must be deducted automatically. That makes it easier to invest consistently regardless of how much or little you earn. Plus, if you leave your job, you can transfer your vested balance into an IRA by doing a tax-free rollover.
ALSO READ: Is it better to have a traditional IRA or Roth IRA?
4. Use innovative investing platforms.
A brokerage account is a terrific option if you don't have access to a retirement account or prefer investing in a taxable brokerage account. Some innovative online options exist, such as micro-investing platforms and robo-investing firms.
For instance, Acorns allows you to round up purchases made on linked debit and credit cards to the nearest dollar or more and automatically invest your spare change when it reaches $5.
Acorns recommends a diversified ETF portfolio based on your risk tolerance, goals, and time horizon. You can own it inside a taxable account or an IRA. Micro-investing can be an excellent way for beginners or those with little money to build wealth.
Some robo-investing platforms, like Betterment, offer various account types, such as high-yield savings, taxable brokerages, and tax-advantaged retirement accounts. They use an algorithm that automatically selects and manages a diversified ETF portfolio for you, based on your stated goals and risk tolerance.
A primary benefit of robo-investing is paying lower fees than a traditional brokerage firm. The more you pay in transaction and ongoing investment fees, the lower your returns will be. In addition, most robo-firms offer convenient mobile apps with features that make setting up transfers and recurring deposits easy.
READ ALSO: Maximize your investments effortlessly: 8 key benefits of robo-advisors explained
5. Reduce your spending.
While reducing spending on a fixed or low income can be difficult, thoroughly review your expenses. There may be leaks, like impulse purchases you can stop. Or, you may be able to cut back more significant costs, like housing and transportation.
Here are some everyday tips to free up more money to invest.
The bottom line is that you don't need a lot of money to invest. Whether working or living on a fixed income, you just need an investing account and a commitment to set aside a small amount regularly. Setting it up as an automated transaction is a powerful way to build a habit of investing and meet your goals.
If you need help choosing investments, seek advice from your brokerage firm. Even robo-investing companies, like Betterment, have human advisors to guide you through opening your account and selecting suitable investments based on your goals if needed.
Before we go, here's a quick reminder to subscribe to The Money Stack, my weekly newsletter, when you visit LauraDAdams.com. It's filled with money tips, tools, news, challenges, and things I enjoy! You can subscribe for free or become a paid member with access to live educational events.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Brannan Goetschius is our director of podcasts, Holly Hutchings is our digital operations specialist, Morgan Christianson is our advertising operations specialist, Davina Tomlin is our marketing and publicity associate, and Nathaniel Hoopes is our marketing contractor.