How to Invest on a Low Income

Man sitting on sofa at home and using smart phone, watching stock charts.

Investing can be a powerful tool for growing your wealth. The goal is to make investments you can afford and lock in financial gains by selling assets for more than you paid for them. Everyone can stand to benefit from investing, even with little income. You don't need a ton of money to get started, what matters most is getting started and sticking with it.

Here are five tips for investing with a low income.

1. Determine How Much to Invest

Your household budget will determine how much you're able to invest each month. The 50/30/20 rule and 50/15/5 rule are popular budgeting styles that prioritize investing. You can also carve out space for investments in a zero-based budget. No matter what method you use, you'll first want to ensure that your basic financial needs are met. That includes your monthly:

  • Housing payment
  • Utilities
  • Transportation
  • Phone bill
  • Child care bills
  • Health care expenses
  • Minimum debt payments

What's leftover can be split between financial goals, like investing and discretionary spending. The latter refers to nonessential spending on things like subscription services, meals out, shopping or vacations. If money feels tight, you could free up more for investing by reducing your expenses or scaling back on discretionary spending. The most important thing is to begin. If that means investing $50 a month for the time being, that's still something.

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2. Balance Investing With Other Financial Goals

If you're investing with a low income, you may have other financial goals vying for your attention. That might include building your emergency fund, paying down debt or saving for a down payment on a home or car. The good news is that it's possible to save and invest at the same time. Imagine each of these things as its own bucket. The idea is to put money into each bucket every month—even if it doesn't feel like a lot, it can still add up over time.

Let's say that after your essential bills are covered, you have $800 left over every month. You might allocate those funds like this:

  • $250 for flexible spending
  • $200 for your emergency fund
  • $200 for debt repayment
  • $150 for investing

After a year, you'd have $2,400 in savings—more if you're using a high-yield savings account—and will have made a sizable dent in your debt. You would have also invested $1,800.

3. Use Tax-Advantaged Retirement Accounts

If you have a 401(k) through work, it could help supercharge your investments—especially if your employer matches some or all of your contributions. Even without an employer match, the money you put in reduces your taxable income, which could help save you money come tax time. Money in a 401(k) also grows tax-free, so you won't owe taxes until you begin making withdrawals in retirement.

An individual retirement account (IRA) might make sense if you don't have access to a 401(k). A traditional IRA is similar to a 401(k), but you can open one yourself through a brokerage or mutual fund provider. A Roth IRA offers different benefits. Contributions aren't tax-deductible, but you'll enjoy tax-free withdrawals in retirement. Just keep in mind that annual contribution limits are higher for 401(k)s.

4. Automate Your Investments

Automating your investments allows you to stay consistent, which can help grow your net worth over time. A good example is contributions you make to your 401(k). They typically happen through automatic payroll deductions, so you don't have to move money every time you get paid. If you're investing through an IRA or brokerage account, you might set up automatic monthly transfers from your checking account.

You can also invest through a robo-advisor. These online platforms gather information about your age, risk tolerance, investment goals, income and assets, then use algorithms to buy and sell investments on your behalf. It's an automated, hands-off way to invest.

5. Explore a Variety of Investments

Regardless of your income, staying diversified is a cardinal rule of investing. Holding a variety of investments can help spread out risk. If you're 100% invested in stocks and the market takes a hit, you could lose a lot of money. But playing it too safe and only investing in low-risk assets could lead to lackluster returns. Diversification can help you strike the right balance. That might mean holding a mix of stocks, bonds, exchange-traded funds (ETFs), mutual funds and more.

The Bottom Line

Investing early and often is usually the best approach, but that can feel challenging if you have a modest income. The most important thing is to start where you are. You can always dial up your contributions as your earnings increase.

Whether you're investing with a low income or not, looking after your credit health is always important. That begins with knowing what's on your credit report. With Experian, you can check your credit report and credit score for free at any time.