How to Build Wealth: Investing On a Budget
Updated: Aug 28, 2022
When I'm out and about and the subject of what I do for a living comes up, the most common response is "I need to come to see you when I get some money." This makes me think that there is a common misconception that you need to have a large sum of money before you can invest. I'm here to tell you that is simply not true.
Let your money work for you!
The secret is in the magic of compounding, which is the process of something building upon itself. Let's say you save $100 and the interest in the first year is 5%, which equals $105. The following year you earn another 5% but on the new total of $105, which equals $110.25, and so on and so forth. This process has the potential to turn a little bit of money into a large amount of money using nothing but time.
One of the ways to start with a small amount of money invested on a monthly basis. If you participate in a retirement plan at work, you are already doing this, but it doesn't have to be just for retirement. Most brokerages and mutual fund companies will allow you to forgo their minimum investment requirements if you agree to save a certain amount of money over a period of time. Which in turn allows you to take advantage of "Doller Cost Averaging".
Don't try and time the market
"Doller Cost Averaging" is the process of investing equal amounts of money over a period of time. Purchasing fewer shares when the market is up but more shares during down markets. Thus reducing your overall price per share.
The type of accounts matter
The two biggest pitfalls when it comes to investing are inflation and taxes. There's not much you can do about inflation except make sure your investments are outpacing it, but taxes are another story. If your goal is retirement then you have a few added bonuses. Money saved in retirement accounts gets deducted from your income and has the added benefit of not being taxed until you withdraw it. You are leaving more money in your account and in your pocket. If you are able to participate in an employer-sponsored retirement plan that offers a match, then that is even more money working for you.
Stay the Course
Building wealth doesn't take a large sum of money. It takes time. Start with what your budget allows and let it grow from there. I think that you'll find your goals aren’t as out of reach as you thought.