Let me start off by saying whether you’re in high school, college, or a recent college graduate, it’s never too early to start investing. Even if you have just $500 saved that you don’t anticipate needing to use in the next year, that is plenty of money to get you started on the path of investing. In fact, the earlier you start investing the greater your returns can be over time.
An example of the power of investing early.
If you invest $500 in the stock market at age 20 and get an average annual return of 7%, which is the average annual return of the stock market according to most data, by the time you are 40 years old your initial $500 investment will be worth approximately $1,900. That’s almost 4x what you started with!
These calculations don’t even take dividends into consideration. Chances are as you get older and your income grows you will invest more and more money. Overtime these investments can add up to give you substantial returns later in life. The take home message is that the time to start investing is now!
Related: Make Your Money Work For You
What should you invest in?
There are many different options you can choose to invest in, but I will discuss some of the more popular options for low budget investors. Keep in mind not all investments are created equal, some are more risky than others. It’s ultimately up to you to thoroughly research a potential investment before you sink your hard earned money into it.
Here are a few common investments you can do on a low budget:
When you purchase a stock you are literally purchasing a portion of a company. Stocks range in price from less than a penny to thousands of dollars per share. One of the most basic ways to trade stocks is to buy low and sell high. This isn’t to say that everything you buy will eventually increase in price as some stocks decrease, stay flat, or the company can even go out of business.
Not only can you buy low and sell high to make a profit on stocks, you can also earn dividends from some stocks. A dividend is a set amount of money you receive for every share you own. When a company pays a dividend they are essentially distributing a portion of the profits to shareholders. Dividends are typically paid two to four times a year. If you own a small number of shares of a particular stock, dividends won’t do much for you. If you own hundreds of shares of a stock or more the dividend is enough that it can almost act as a source of income in some cases.
The return you can expect to see from investing in stocks can vary greatly. For example, you could buy a volatile penny stock (I don’t recommend this) that shoots up 500% overnight, or it could completely tank and the company goes out of business. If you invest in a more stable company (I recommend this), you could expect an average annual return of about 7% according to most historical data. This isn’t to say stocks will go up 7% every year. They may be down 20% one year then up 27% the next year, but the the average annual return of the stock market has averaged about 7% for long term investments. In all honesty it’s hard to say what kind of return you can expect as there are so many different stocks you can invest in and the timing of your investment can play a crucial role.
Related: Introduction To Stock Investing
When you purchase a bond you are essentially lending money to the company or government you purchased it from. In return, they pay you interest on the money and will eventually pay you back the face value of the bond at a specified time.
One advantage of investing in bonds versus stocks is that bonds are generally a lower risk. If your bond is with the government it is practically risk-free. The downside to investing is bonds is that the return on your investment is often much smaller than what you can get investing in stocks. As of 2017, the current rates for U.S. savings bonds ranges from 0.10%-2.76%. At these rates, an investment in bonds at this point in time may not even keep up with inflation.
When you buy a mutual fund you are buying a group of stocks or bonds. The group of stocks or bonds in the fund are selected by the fund managers. The different types of funds include money market funds, bond funds, and stock funds.
The advantage of mutual funds is that you don’t need a lot of money to invest. This is also one of the most cost effective ways to create a diverse portfolio that way you aren’t hinging your entire investment on one stock or bond. Another advantage of a mutual fund is that if you are a novice investor it provides a professional management team that take care of choosing the stocks or bonds to include in the fund.
So how do make money from mutual funds? Just like investing in stocks, you can receive dividends from funds that hold dividend paying stocks. Likewise, bond funds will pay you interest. For stock funds, when the fund managers sell a particular stock for a profit, the profit gets distributed to fund owners at the end of the year minus any losses. Another way you can make money is to sell your shares in the fund after the fund has increased in value.
The main risk of mutual funds is that just like stocks, they can go down in value.
Many investment options are available.
Stock, bonds, and mutual funds are only a few of the many investment options available. Other popular investments include real estate, annuities, savings accounts, 401K’s, IRA’s, and stock options. What you choose to invest in is ultimately up to you. The amount of money you have to invest and the risks you are willing to take will help to determine which investments may be right for you.
Before choosing what to invest in it’s beneficial to look at the current state of the economy. For example, in past years you could get a decent interest rate on a savings account, but now the rate is so low that the interest you earn will hardly amount to anything relative to what you invest in it.
The take home message is that you should thoroughly research a potential investment before actually making the decision to invest. After all, you worked hard for that money. Happy investing!