Smart Moves to Start Investing on Any Income

Learn to grow your money no matter how much you earn.

Laura Adams, MBA
5-minute read
Episode #207

Whether you earn a little money or a lot, you should save and invest some of it for the future. Living without a financial safety net is a surefire way to get into trouble and can be a huge source of stress in your life. The sooner you get into the habit of putting money aside, the better off you’ll be. In this article I’ll cover the smart moves you need to make to invest like a pro no matter how much you earn.

How Much Money Should You Invest?

One of the best financial goals you can set for yourself is to invest at least 10% to 15% of your income. If that’s too much for you right now, you can still invest like a pro even if you have just $50 left over each month. And if you don’t have $50 left over, be sure to read my previous article,Smart Moves for Guaranteed Financial Success, where I cover how to create a spending plan in six easy steps.

Here’s an example of what investing just $50 a month can do for your future: Let’s say you’re 30 years old and have 40 years to go before retiring at age 70. When you invest money over a 40-year period, some years could give you fabulous returns of 12% or more, but other years might return a measly 4% or less. If you figure on making an average of 8% over 40 years, you’d accumulate close to $175,000 to draw from when you retire.

Where Should You Invest Your Money?

Don’t make the mistake of thinking that no one wants your money if you don’t have much to invest. Even on a tight budget, you still have options to make your money grow. Once you know how much you want to invest, you need to decide where to invest it. Here are four smart places to invest your money:

Investment Option #1: Workplace Retirement Plan

If you have a retirement plan at work, like a 401(k) or a 403(b), be sure to take advantage of it. I always recommend making a workplace plan your go-to investment choice because many employers offer matching funds, which is free money. Making contributions to a retirement account also saves you money on taxes and it happens automatically, before you ever see your paycheck. You can invest a percentage of your income or a flat amount per pay period up to the annual limit set by the IRS, which is $16,500 for 2011. If you’re age 50 or older you can contribute up to $22,000 for 2011.

But if you only have $50 a month to invest in your company’s retirement plan, don’t be ashamed to participate—as I mentioned, even investing a small amount will do wonders for your future. If you’re paid twice a month, simply elect to invest $25 per paycheck. You can increase or decrease your contribution amount at any time. If you have questions about how your plan works or what investments to choose, you can get free advice from your benefits administrator or from the investment broker who manages the plan for your employer.

Invest Option #2: Retirement Account for the Self-Employed

Don’t make the mistake of thinking that no one wants your money if you don’t have much to invest.

If you work for yourself or own a business, there are great retirement options designed just for you, like a SEPor a SIMPLE plan. I won’t cover those in detail here, but instead I’ll refer you to chapter 7 of my book, Money Girl’s Smart Moves to Grow Rich, where I cover everything you need to know to choose the best type of account. You can use an online brokerage or a fund family like TD Ameritrade or T. Rowe Price to set up your own retirement plan. Having a small business retirement account is a nice way to offer benefits to your employees and to get tax breaks for your business.

Investment Option #3: Individual Retirement Arrangement (IRA)

If you don’t have a job that offers a retirement plan (or if you do, but don’t get employer matching) consider investing in an IRA. You’ll get great tax benefits and the freedom to choose from a wide range of investments. You can invest up to $5,000 for 2011 or up to $6,000 if you’re age 50 or older. You can get answers to the most common questions about IRAs in a previous article, 15 IRA Rules You Should Know.

Here are just a few of the many online brokerages and fund families where you can open up an IRA:

  • Fidelity at fidelity.com has no annual fee but requires a minimum of $2,500 to open an IRA—unless you set up automatic contributions of at least $200 per month.

  • Schwab at schwab.com has no annual fee but requires a minimum of $1,000 to open an IRA—unless you set up automatic contributions of at least $100 per month.

  • ShareBuilder at sharebuilder.com has no annual fee and no account minimum to open up an IRA. If you use their automatic investing plan, you can buy partial shares of stock or funds. That means if you want to buy an expensive stock, like Google for instance, that costs over $600 per share right now, but you only have $50 to invest each month, you can buy fractions of a share. That’s a great feature since most brokerages require you to buy full shares of stock. 

Investment Option #4: Taxable Brokerage Account

If you’ve maxed out contributions to a workplace plan or an IRA and still have money left to invest, you can put as much as you want in a regular brokerage account. These non-retirement accounts don’t offer any tax advantages but do allow you to make withdrawals at any time without having to pay an early withdrawal penalty. Examples of online brokerages where you can open up and invest in a taxable account are ETRADE, Scottrade, and Zecco.

If you haven’t started an investing program yet, make a commitment to begin putting aside a small amount of money on a consistent basis. Having a fancy retirement plan at work is great, but rememberthat you have other options to build wealth—like an IRA and a regular brokerage account. If you already invest, consider increasing your contributions this year so you can build wealth at an even faster pace and make sure that you’ll retire on time.

Money Girl’s Smart Moves to Grow Rich

To make sure you’re making smart moves for every money matter in your life—from finding the highest yielding bank accounts, planning for retirement, saving money on taxes, buying real estate, using modern financial technology, and lots more, pick up a copy of my new book, Money Girl’s Smart Moves to Grow Rich. It’s available in local book stores or on Web sites like Amazon.com and Barnes & Noble.

If you want to sample the book first, you can download two free book chapters at SmartMovesToGrowRich.com! Reviews praise the book as one that will enable you to “create a richer life—both financially and emotionally.” (Publisher’s Weekly)

Connect with Money Girl!

If you’re ready to make big changes in your financial life, find out more about Laura’s one-on-one Financial Life Coaching at SmartMovesToGrowRich.com. For more money tips and advice, sign up for the free Money Girl newsletter and connect on Facebook and Twitter. E-mail your money questions to money@quickanddirtytips.com.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.