How to Invest on a Low Income: A Guide for Beginners

Key Takeaways

Introduction

• Explain what investing is and why it is important for everyone, especially for low-income earners.
• Mention some of the benefits of investing, such as building wealth, achieving financial goals, and beating inflation.
• Address some of the common myths and barriers that prevent low-income earners from investing, such as lack of knowledge, lack of money, or fear of losing money.
• Provide an overview of the article and what it will cover.

How Much Do You Need to Start Investing?

• Explain that there is no minimum amount required to start investing, and that you can invest with as little as £1, depending on the platform and strategy you choose.
• Provide some examples of platforms that allow you to invest with little money, such as Acorns¹, Nutmeg², or Evestor³.
• Explain that the key to investing with little money is to save money regularly and consistently, even if it is a small amount.
• Provide some tips on how to save money, such as setting a budget, cutting expenses, finding extra income sources, or using apps that help you save automatically.

What Are the Best Ways to Invest on a Low Income?

• Explain that there are many ways to invest on a low income, and that the best way depends on your personal situation, goals, risk tolerance, and preferences.
• Provide a list of some of the best ways to invest on a low income, such as:
  • Saving money in a cookie jar or a savings account: This is the simplest and safest way to start investing. You can save money in cash or in a bank account that pays interest. This will help you build an emergency fund, which is essential for any investor. You can also use this money to invest in other ways later.
  • Enrolling in your employer’s retirement plan or opening an IRA: This is one of the most effective and tax-efficient ways to invest for your future. If your employer offers a retirement plan, such as a 401(k) or a pension scheme, you should take advantage of it. Your employer may match some of your contributions, which is free money. You can also open an individual retirement account (IRA), which is a type of savings account that offers tax benefits. You can choose between a traditional IRA or a Roth IRA⁴, depending on your income and tax situation.
  • Letting a robo-advisor invest your money for you: This is one of the easiest and cheapest ways to invest on a low income. A robo-advisor is an online platform that uses algorithms to create and manage your portfolio based on your goals, risk tolerance, and time horizon. You just need to answer some questions about yourself and deposit some money. The robo-advisor will do the rest for you. Some examples of robo-advisors are Nutmeg², Evestor³, or Wealthify⁵.
  • Investing in the stock market or the real estate market with little money: This is one of the most popular and potentially rewarding ways to invest on a low income. You can buy shares of companies or properties that pay dividends or rent. You can also buy funds that track the performance of a market index or sector. You don’t need a lot of money to do this. You can use platforms that allow you to buy fractional shares or crowdfund real estate projects. Some examples are Trading 212⁶, Freetrade⁷, Property Partner, or Bricklane.
  • Putting your money in low-initial-investment mutual funds: This is one of the most diversified and convenient ways to invest on a low income. A mutual fund is a pool of money that is invested in a variety of assets, such as stocks, bonds, or commodities. You can buy a share of a mutual fund and benefit from its performance. You don’t need to worry about choosing or managing the individual assets. You just need to find a mutual fund that suits your goals, risk tolerance, and fees. Some mutual funds have low initial investment requirements, such as £100 or less. Some examples are Vanguard, Fidelity, or Charles Schwab.
  • Avoiding fees and paying off your high-interest debt: This is one of the most important and often overlooked ways to invest on a low income. Fees can eat up a large portion of your returns, especially if you invest with little money. You should look for platforms that charge low or no fees, such as robo-advisors, index funds, or commission-free brokers. You should also pay off your high-interest debt, such as credit cards, payday loans, or overdrafts. This will save you money on interest and free up more money to invest.
  • Investing in education or in what you know: This is one of the most valuable and long-term ways to invest on a low income. Education can help you increase your income, skills, and opportunities. You can invest in formal education, such as degrees, diplomas, or certificates. You can also invest in informal education, such as online courses, books, podcasts, or mentors. You can also invest in what you know, such as your hobbies, passions, or talents. You can use your knowledge to create products, services, or content that can generate income for you.

How Can You Reduce the Risk of Investing?

• Explain that investing involves risk, which means that you can lose money as well as make money.
• Explain that risk is not necessarily bad, as it is related to reward. The higher the risk, the higher the potential reward. The lower the risk, the lower the potential reward.
• Explain that you can reduce the risk of investing by following some principles, such as:
  • Diversifying your portfolio: This means spreading your money across different types of investments, such as stocks, bonds, real estate, or cash. This will help you reduce the impact of any single investment going down in value.
  • Choosing low-cost and passive investments: This means selecting investments that charge low or no fees and that do not require active management. This will help you keep more of your returns and avoid making emotional decisions.
  • Reinvesting your dividends: This means using the money that you receive from your investments to buy more shares or units of the same or different investments. This will help you increase your returns and compound your wealth over time.
  • Investing for the long term: This means holding your investments for at least five years or more. This will help you smooth out the fluctuations of the market and benefit from its overall growth.