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The burden of student debt, a competitive job market and credit card bills may leave you feeling like you’ll never be able to dip your toe into the world of investing. Luckily, there are ways to save despite these financial challenges and you may be more equipped to invest than you think. According to a study published by UBS, citizens ages 21 to 36 are the most fiscally conservative generation since the Great Depression. The majority of Millennials in the study said saving was the best financial advice they had received, while other generations said investing was the best.
So, you may already be ahead of the game if you have started saving early and regularly. The next move is to leverage those savings by making smart investment decisions.
Here are a few essential tips you should keep in mind if you're investing with little money.
1. Avoid the Seven Layer Dip Of Fees When Investing
If you’ve never dug into the world of stocks and bonds before, the volume of investment choices may seem overwhelming-especially when you're investing with limited money- Your financial health may improve substantially with the guidance of a financial advisor or broker but paying excessive fees will not help your investment performance over time. As you build your investment portfolio, be sure to watch out for these investment fees:
- Mutual Fund Fees
- Mutual Fund Surrender Penalties
- Brokerage Trading Commissions
- Internal Mutual Fund Operating Costs
- Wrap Management Fees
- Markups on Bonds and New Issue Securities
- 12b-1 Fees
Learn more about these fees here.
Ask your advisor about their fees and be informed on all the ways you’re paying for their service.
2. Don’t Put Off Saving, Opt Into Your 401(k)
Investing isn't just for the rich and neither is retirement saving. Just like when you're investing with little money, when it comes to saving for retirement, the sooner the better. The smartest investors make saving a priority and exhaust all of their available options from IRAs to 401(k)’s. If your employer offers a 401(k), that is an excellent place to start. Opting into your 401(k) will boost your retirement savings in several ways:
- Contributions are pre-tax: 401(k) contributions come out of your paycheck before taxes so they reduce your taxable income for the year and allow you to save more.
- Contributions might be eligible for an employer match: If your company offers a matching contribution, they may match a percentage of employee’s contributions, usually up to 6% of their salary.
- Contributions are automatically invested: 401(k) plans typically offer a diverse array of investment options that are appropriate retirement investing. Keep in mind that investing in inexpensive funds will help you avoid unnecessary fees.
3. Diversify Your Portfolio And Don’t Be Afraid To Take Some Risks
The UBS Investor Watch research shows that millennials have a Depression Era mindset when it comes to risk-taking with investments. The consequences of the 2008 financial crisis have significantly influenced financial behaviors and attitudes toward the market and long-term investing. According to CNN, 52% of the millennials surveyed indicated low confidence in the stock market, with more of a focus on preserving their savings. Money won’t disappear in a savings account but it doesn’t grow substantially either. Investing in equities while you’re still young can help grow your savings while simultaneously allowing you to take greater risks for a higher reward than only investing the money in bonds.
Don’t put all your eggs in one basket! Holding a diversified portfolio of stocks, bonds and other assets exposed to multiple sectors of the market could greatly diminish your odds of losing a lot of money(This helps when you're investing with limited money.) Everything in life involves a certain amount of risk and this is undoubtedly true when it comes to investing.
Living through a recession and watching unpredictable markets teaches you many valuable lessons about the financial world. Fortunately, one of these lessons is to be more cautious with money you do have, which is a smart strategy, but the trick is not to let this handicap your investments. Investing with limited money can be intimidating but a good way to make the most of your earnings and to grow your wealth is to save regularly, diversify your investment portfolio, and accept risk-taking as a part of the investing world.
If you’re considering opening an investment account, talk with one of our investment advisors at Wela. Our digital financial advisory service allows you to work with a real advisor, but on your time and on your technology.
Disclosure: The information is provided to you as a resource for educational purposes only. Nothing herein should be considered investment, legal, or tax advice. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. It is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.
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Let's get straight to it, some sobering news for you...when you add up the taxes you pay to the feds, payroll tax, Georgia state, etc., you’re probably paying more than 30 percent of your income to some form of government. And this doesn't even include property, sales, gas, and ad valorem taxes. I don’t advocate moving to Canada or Europe -- unless you want to pay even more taxes. What you can do is educate yourself and adopt what I call a TSL-driven budget. That's a budget containing the three buckets where most of our dollars go: Taxes, Savings and Life.
Your day to day budget and your retirement planning will be a whole lot easier with my TSL guidelines:
Taxes: 40 to 50 percent
Pro golfer Phil Mickelson recently got in hot water when he complained 62 percent of what he earns goes toward taxes. Few of us feel sorry for a guy who makes close to $50 million a year. But his complaints weren’t that far off the mark, even though CNBC reported his estimate was a little high.
Consider the new federal tax bracket that’s nearly 40 percent on families with annual income north of $450,000, add California’s 13 percent income tax, and you almost start to feel sorry for Lefty.Almost.
Taxes take a huge bite out of all our paychecks. So budget 40 percent of your income for taxes (closer to 50 percent for really high income households), and you’ll have a good sense of what’s left for your Savings and Life buckets.
Savings: 20 percent
For many years Vanguard recommended saving between 8 and 12 percent of your gross income to guarantee a happy retirement. Recently, they upped that guideline to 12 to15 percent, thanks to lower return expectations in the future. I advise clients to try to save 20 percent of their gross income.
Twenty percent is a significant number, but take into consideration the many tax-advantaged ways to save -- such as a 401(k), 403(b) or a SEP IRA -- and you can get there a lot faster than you might think. And you may be able to retire a lot sooner than you think.
If 20 percent seems unrealistic right now, just start somewhere and work up to it.
Life: 30 to 40 percent
Now, we’re at the truly discretionary spending. The remaining 30 percent (40 percent if your tax bite is lower) of your income goes here. Spending just 30 to 40 percent of your income during your working years on living (food, shelter, transportation, insurance, kid-related costs, entertainment and the like) will allow you to maintain your lifestyle once you retire.
For Mickelson, that’s means limiting his Life spending to about $15 million a year.
My TSL formula may seem harsh at first, but who ever said getting to Easy Street (and a happy retirement) was going to be easy?