How to Invest on a Low Income

Investments can work against you.  Most investments carry some degree of risk.  This degree of risk generally determines the extent of your possible return.  Generally, the greater the risk, the greater the reward.  As such, safe investments like savings accounts and certificates of deposit generally yield very low returns when compared to the returns of other investments.  However, if your financial situation does not allow you to invest a lot of money, it is safe to conclude that your financial situation does not allow you to risk losing a lot of money.  As such, safe investments may be your best bet.

Before you can invest, you must have money to invest.  As such, you need to get your current financial situation under control before you can invest.  One of the biggest investment mistakes people make is that they invest money in low yielding investments before paying off high interest debt.  It does not make sense to invest $100 in a savings account yielding 3% per year when you have a $100 debt on your credit card with a 20% yearly interest rate.  Essentially, by investing in the savings account, you will lose 17% per year on your money.  Therefore, pay off high interest debt before you invest in low yielding investments.

Once your financial situation is in better shape, you can begin to invest in small amounts.  If money is tight, small, consistent investments are the best way to go.  You will not see any kind of significant gain for a long time, but after several years, you will see noticeably growth in your investment.

If you adopt the “small and consistent” investment approach, you should invest in a savings account or some other deposit account with compound interest.  Through the magic of compound interest, your small, consistent investments will turn into a substantial nest egg after several years.

Investing over a large number of years may sound tedious and difficult.  However, you can automate the process.  Your money will be automatically invested for you at a time and for a dollar amount you designate.  This is perfect if you are in a low income situation because you can automatically invest small amounts over a long period of time without having to think about it.

It is vitally important to note that no investment is too small.  Something as small as a $10 monthly investment can grow into a large nest egg if invested consistently over a period of several years.

Remember, your first priority should be to fix your current financial situation.  Do not invest money in lieu of paying off high interest debt.  If you have limited resources, safe investments are probably a better bet.  Finally, automate your process of investing small amounts consistently over a long period of time, and you could build a substantial nest egg.