One of the biggest reasons people don’t invest outside of a 401K, beyond a fear of investing, is that they think their savings levels are too low to invest.
“How can I possibly invest when I am only able to save $100 (or $200, $300, etc.) per month?!” or “I only have $2,000 in savings – not enough to invest” are variations of the most common objections I hear.
When I’ve dug further, I’ve found that here are usually two thoughts that lead to the apprehension:
- they think they don’t have enough to invest for it to make a difference or to be investing in the first place
- they think that trading fees will be too excessive for the amount they have to invest
Both can be easily overcome. In this post, we’ll discuss overcoming the first sentiment.
“I Don’t have Enough Savings to Invest”
Let’s break those who are saying this down into two camps:
Those with Debt
If you have significant high-interest debts (i.e. credit card, auto loan, etc.), you are correct, you should not be investing. This is an emergency situation and any savings should go directly towards paying off that debt immediately.
Why not invest when you have debt?
It is extremely difficult to earn a return every year that will exceed the 20%, 10%, or even 7% interest rates that plague your debt.
Pay off the debt, and you are getting a guaranteed savings return equivalent to that debt’s interest rate. Guaranteed returns that high in the investment world are non-existent.
Once you’ve paid off your debts, then you can start thinking about investing.
Those without Debt and Small Savings Levels
If you have a few months of living expenses saved up in a free checking account somewhere, that is all you really need for emergency scenarios, like a job loss. You want liquid (quickly accessible) money in the event you should need it to cover your living expenses.
Once a few (2 is probably sufficient) months of emergency savings are squared away in a checking account and you don’t have any huge one-off expenses coming up, you should start investing subsequent savings.
Here are 4 reasons why you should start investing, even when you have little savings:
1. Inflation is Eating your Savings
If you don’t invest, the value of your money is being eroded over time with inflation.
The average annual U.S. inflation rate has been 3% from 1913 through 2014.
That means 3% of your saving’s value will be lost each year, on average.
Investing is the only way to overcome inflation’s detrimental impact over time. This is reason #1 why you should be investing – it is a necessity.
2. Why Not Put your Money to Work for you?
When your investment returns go beyond keeping up with inflation and beat it, your savings grow at a compound rate.
Think of every share you own as an employee who is going out and working for you. Sure, these employees may occasionally let you down, but over time, they usually get the job done. Eventually they start hiring other employees to join them – that’s called “compounding”.
3. Healthy Habits have to Start Somewhere
Getting in the habit of investing is healthy to develop. If you are constantly using “I don’t have enough to invest” or similar chirping complaints as an excuse to not invest, you will NEVER start investing.
Every beginner investor has to start somewhere. Why not start with $500, $1,000, or $2,000 and move up from there?
4. Keep your Savings Safe from their Biggest Threat
Speaking from personal experience, once you contribute your money to an online broker, you don’t want to pull it out for any reason other than necessity. In a way, to do so is admitting personal defeat. In another way, most of us are too lazy to log in to our accounts to do it.
For most people, if savings are just sitting in a checking account, that money is usually looked at as “money to be spent”.
Keep your savings safe from yourself.
Investing with Small Savings Discussion:
- Have you started investing with small savings? How did you get over your fears?
- If you have smaller savings levels, what is holding you back from investing?
- If you are an experienced investor, what tips do you have for those starting out?
This isn’t really sound advice for everybody. It’s great that you’re comfortable with the stock market (I am too, for the record), but you could really damage someone’s financial future by saying they must invest in the stock market. How would you have responded to an article called “Why you NEED to buy property (Even if it’s a small parcel)”?? Sounds pretty terrifying and “out of your wheelhouse” if you’re not comfortable with real estate, right?
There are plenty of other ways to “invest” that could
1.) produce higher returns
2.) be more appropriate for people with talents unlike yours
3.) provide consistent income for the long term (as opposed to fluctuating returns of the market).
For example, Tim Ferriss has said that he’s not comfortable investing in the stock market and chooses to invest in himself, his businesses, angel investing in other businesses, etc. People who are comfortable with running businesses would be better advised to use their savings toward this goal, which has its own pros and cons as compared to the stock market.
Other people who have experience with real estate or home renovation would be better to put their money toward that. Paula at Afford Anything demonstrates that her best bet toward income-generation and equity growth is through real estate…and even says she’d gladly (happily!) go into debt to achieve those goals (http://afford-anything.com/2011/03/11/if-i-had-a-million-dollars-id-go-into-debt/)
What I think you’re wanting to say is that you should start somewhere when it comes to growing your money. The VERY first think you should do is assess your talents and interests and NOT jump blindly into anything I listed above (stock market, real estate, businesses, MLM, highway robbery, whatever). Then save money to put toward your goal. Then take action.
I enjoy your rebuttals, Leah. But, Tim Ferris? Isn’t he the guy that recommends eating frog testicle to boost your sex drive???
You do have a point that there are other forms of investment that one should consider (and I’m not saying don’t make OTHER investments, diversity is a good strategy), but I still believe that everyone should start somewhere with market investing as they are saving towards other investments. Why? For starters, investing in the market is the most accessible form of investment that one can make.
How much income does it take to:
1. buy real estate?
2. renovate a home?
3. buy more education?
4. start a business?
Those are all very high capital (high savings/high debt) endeavors. I don’t have anything against each of those investment ideas (other than maybe education), but what do you suggest one does with their cash while they are growing that capital? Let it sit and erode with time? What if they never reach their goal of saving a few hundred $K for a property to rent out? They’ve missed out on 10, 20 years of market returns?
Investing in the market is not only the most accessible, but it is the most flexible form of investment. There are a variety of strategies one can take within market investing: growth, high dividend, bonds, real estate, water, energy, etc., etc., etc. With a real estate ETF, for example, you could start with a $50 investment, get a 6% dividend yield, and move up from there. Investing in buying a home takes significantly more capital, risk, and education.
Then there is the time needed to get started. You could literally start today, if you wanted. Few other investments can be made without significant capital, which takes time (or extremely rare and lucky events) to grow.
Yes, Tim Ferris is a wacky dude and all, but he’s a multi-millionaire through angel investing and hasn’t found that level of success in the stock market. Sure there are other examples of rich people who shun stocks, but I went with the famous-in-the-blogosphere guy.
Also, the funny thing about the four things you listed is that they can almost all be done very inexpensively for the motivated, talented person!
Scholarships exist for education/continuing education, independent study can be done for free at a library, starting a biz could require as little as $100 capital (a la Mr. Chris Guillebeau’s new book and, you know, while we’re at it, a Tim Feriss-style business ;), home renovation can be done on the cheap if you know what you’re doing, and mortgage rates for homes are the cheapest they’ve ever been (if you’re smart with debt and have a proclivity toward real estate)!
And yes, I would advise that people just let that money hang out in an interest-bearing CD or money market account while they save up what they need. No one knows when 2000/1 or 2008 will happen again, so why risk your “investment” money in that kind of harsh environment? Just getting a few guaranteed percentage points per year on a short-term savings is pretty good for me.
Yes, investing with $50 is easy, but it’s not something everyone NEEDS to do. Blindly adopting any investing strategy just because it’s easy is a pretty scary thought right? If you don’t know what you’re doing and just start throwing your money $50 at a time into the first investment you see with an upward-trending graph, you could get yourself into trouble.
I guess the follow-up post for this should be a compilation of books & resources to educate new investors.
I personally would not be happy earning 0.5% on my cash in a CD or money market (current rates) with inflation rates around 3%. I’d be losing 2.5% per year like that. We’ll just have to agree to disagree on that one.
I’m a new investor, and I think what Mr. Miller is talking about is that “investing” in the market is very easy. And it is. With a little bit of Googling, you can find LISTS of great buys on the market, and with a website like this, you can get a very elementary breakdown of how to invest. Real estate, education, etc. all require either extensive research, or time commitment (or going back into debt).
As far as the best line of this piece: “In another way, most of us are too lazy to log in to our accounts to do it.”
That’s me, and before I took more interest in my investments,it was easy to just put $1,000 into a mutual fund with a good track record (again, simple Google search) and be pleasantly surprised every year at tax season.
Nobody NEEDS to exercise, eat healthy or invest a small investment in the market, but they’re all easy ways to improve your quality of life, if you can.
My concern isn’t having enough money in my savings to start investing, its that I want to use my savings for a down payment on a house. If I start investing the money will be tied up for a long time- so how do I balance these two goals?
Never invest money that you will need in 5 years time or less because you have no idea what the stock market might do in the short term. You’re better off putting your money in some short-term CD’s, money market accounts, or other low-risk securities.
6 months of necessary expenses is the standard to have saved as an emergency fund.
Only 2 months of emergency fund is cutting it really close. I’d recommend building it up to 6 months expenses minimum.
I recommend 6-9 months, with 2 months immediately accessible and liquid. Anyone should easily be able to withdraw any funds needed from a discount broker within 2 months to build your emergency stash, if needed.
I just got my first real career job and would love to start investing beyond my 401(k). The problem is that I earn $33,000/year. In itself, it’s not bad since my only debt is a car loan.
The real issue is that after all my “needs” expenses are met, I’m left with about $300/month. I put $100 towards irregular expenses, and the rest towards savings for a house. (I already have a pretty good EF set up)
Where/how would you recommend starting to invest when you very little money?
I could scrimp together $50/month and would preferably like to go towards a mutual fund of some sort.
Will highlight in an upcoming post.
Awesome, since I’m wanting to start investing by August! Any advice is well appreciated.
I have found investing in mutual funds to be best and easiest for me. I’m no investment expert (although, I do enjoy investigating) and once I saved up the minimum necessary for Vanguard funds, I was able to set up monthly automatic deductions. Then I allowed myself $100 per month to spend on individual stock based on what I find interesting – I consider this important, but it’s also “fun” to see what happens with one or two individual stock. For that I use TradeKing, G.E. recommended it a while back and I agree that it’s a great discount broker that doesn’t erode my funds with high trading fees.
Don’t you find it nerve wrecking investing in individual stock??? It kind of freaks me out.
Picking individual stocks is pretty risky imho. 90% of active fund managers can’t beat the S&P 500 index year in and out. So I find it funny when your average joe investor thinks he can.
Don’t get me wrong; I will buy an individual stock if I think it’s undervalued. However, the amount won’t be for any significant percentage of my overall portfolio.
I’m sure there are people that have great results doing this, but I doubt many do.
I would love to see some numbers on how many people bet it big on the Facebook IPO.
I’m a big fan of investing, but a lot of people are just not comfortable with putting their money into the market, especially given the current market environment. If we’re going with an action one needs to take to save money for the long term, I would go with a title of “Why you NEED to contribute money to a tax-advantaged account” and figure out the investing part after reading up on some educational investing material.
Tax advantaged accounts = Roth 401k, Traditional 401k, Roth IRA, Traditional IRA, and HSA’s. That’s 5 different accounts that one could contribute to for a total annual contribution of up to $25,100 for 2012 for a single individual.
There is absolutely nothing comfortable about market investing, particularly given the current market environment.
Those who have fled because of uncomfort a few years ago missed out on a huge rebound.
And there are many smarter investors than I who recommend buying at times of discomfort/panic. Buying only when everything is swell is a key recipe for horrible performance.
Agreed, people should leverage tax advantaged accounts.
I’m 25 and have been working for 5 years now. I fall under the “don’t have enough savings” category because of credit card debt – which is now under control. So what’s holding me back?
I do plan on investing next year when I have decent savings. I’m rushing it a bit because I think time is on my side and even if I decide that I’d rather spend my money elsewhere after.
My goals for investments as time progresses are:
– retirement acct (done)
– tax deferred acct (done)
– invest in stock
– real estate (land not home)
– as Leah pointed out, investing towards a more personal goal…whether it be business or angel investing
I’d love to see an article go into detail about inflation in respect with money management. What about when dealing with foreign investments?
Before the stock market, how did people hedge against inflation?
Most people should probably invest (account wise) in this order:
1) 401k up to company match //free money
2) Roth //tax free profits
3) Rest of 401k //lower your taxes
4) Regular taxable acct
For some people maxing out their 401k may be a better priority. Obviously maxing out your 401k and Roth is ideal, but is pretty rare from what I’ve seen.
As to these being “bad” market conditions; that is the best time to buy. My favorite Warren Buffet quote:
“Be fearful when others are greedy. Be greedy when others are fearful.”
I keep 10-20% of my portfolio in cash/bonds for buying opportunities like this past summer/fall with the debt limit/Greece fiasco. I still kick myself for not putting more money into stocks in 2009 after the market crashed..
For sure. I should have included the assumption that you are already maxing out your match – which everyone should do.
I don’t necessarily agree with maxing out your 401K before regular taxable though, as you are either going to pay taxes now or pay taxes later. The only question is do you want more money for early retirement (taxable), or more money held for traditional retirement (non-taxable).
To me the power of deferring taxes is pretty big. I’d even give preference to a non-deductible IRA over a taxable account for that reason (uncommon scenario though).
Also as your income hopefully grows; maxing out a 401k can help keep your taxes in check and maybe in a lower bracket. If it wasn’t for 401k; I wouldn’t even qualify for a full Roth contribution.
If you have a terrible 401k plan at work then that’s different.
What a massacre today was in the stock market. Perhaps we should wait until after the elections to invest.
A good time to buy, no?
You want the stocks to get more expensive before buying?
Not at all. However hiring has been going down for the past couple of months. I believe we’ve got a ways of until we hit bottom.
If you are able to predict market peaks and bottoms then sure, go for it.
I’m no sage. Just giving an opinion based on current employment data. I’m betting it gets worse. If you believe now is a good time to buy, more power to you.
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Helen-My heart goes out to you for the loss of your mother. I hope you have many happy memories to hold on to and that you give yourself some TLC. Caring for a loved one takes its toll on us emotionally and physically. My friend and I had shared laughter and tears, mostly laughter. Hysterical laughter. Thanks for sharing your thoughts with me here. It means a great deal to me.
The unemployment data has been made public. That means it has already been priced into the market.
I’m assuming continuing weak hiring as has been the trend. Worsening numbers will only bring down the market. I won’t dip until I see better numbers.
May I ask why people suggest opening a Roth IRA after meeting your employers match instead of maxing out the Roth 401k?
If you are participating in your employers 401(k), it’s through a third party and well diversified, shouldn’t you max out that?
I’m very happy with my roth 401(k) plan and feel that managing company has done a great job on where to invest. What would be the advantages to me opening up a whole new account?
Always get your employer’s match first. Beyond that, opening an IRA or non-retirement account can actually be cheaper than a 401K, and you will have significantly more investment options.
With a normal 401k; the main reason to go with Roth over 401k after the company match is taxes. With Roth 401k; then the advantage for Roth IRA becomes less assuming the 401k has low fees and good investment options. It is rare for a 401k to offer very good options across all asset categories. My previous 2 employers only offered one low cost index fund.
A Roth IRA still has some advantages. The contributions/principal can be withdrawn at any time; penalty free. So it could be use as a another emergency fund; only as last resort. Also, you’re not forced to take distributions at a certain age.
For me, I use normal 401k because it lowers my taxes and in combined with my mortgage deduction keeps me in a lower tax bracket.
The reason I ask is that my company’s Roth 401(k) plan includes a choice of 5 different mutual funds (conservative to aggressive). I’m already contributing to the employers match and have seen pretty good results; meaning I haven’t lost any money and gained a little. Some of the funds include names such as Vanguard, T Rowe Price, Oppenheimer, Van Eck etc.
I’m thinking about bumping my contribution up to 10% instead of opening an IRA for this reason. But, this is against what most people recommend.
What are the expense ratios of the funds you want to invest in your 401k? Anything over 1% is a red flag. I personally don’t like anything over 0.35%. The Vanguard one is probably very low, but not sure about those other companies you mention.
Does the 5 funds offer the diversification you need (large/mid/small cap, international, short/long/inflation/high yield bonds, etc)?
There is no way a 401k can match the flexibility and options of a Roth. You can day trade, buy ETFs, options, short stocks, even purchase property in your Roth.
Most 401ks only have mutual funds, have restrictions against frequent trading, takes a couple days for a trade to execute, etc.
Lastly, in my opinion a Roth 401k doesn’t make sense for most people. A Roth 401k or Roth IRA is only better if you are sure that you’ll be in a higher tax bracket when you retire. Who knows how things will be decades from now.
That is why most will say use a normal 401k to lower your taxes now and use a Roth IRA to protect against higher future taxes. You get the best of both worlds.
Actually you get the best of both worlds with a Roth 401K. Although your contributions are done on an after tax basis, your companies match will be done on a pre-tax basis. My last two employers did it this way. When I left I had a 50-50 Roth-Traditional split.
I would love to see a follow-up article about where to begin. I have been in the workforce for about four years. The first two years were hard, with very low pay. Despite having HUGE student loan debt, I am able to save now more than ever. I would like to see some options, like safe investments with good returns, even short-term investments. Also, I am a bit financially illiterate, so explanations needed!
Safe investments with good returns ;-) If there was such a thing, I wouldn’t have to worry about my retirement.. Unless you can predict the future; there will always be risk involved and no guarantees.
The fact that you’re young and making saving a priority puts you ahead of most.
Check out: http://www.bogleheads.org/wiki/Main_Page
That site has plenty of good info for beginners to advanced topics. Keep in mind this site is geared to those who believe in using low cost index funds/ETFs (especially Vanguard ones) versus active funds or individual stock picking.
Good topics to learn: asset allocation, rebalancing, dollar cost averaging, compounding interest. Get the hang of those and you’ll be on your way.
Do you recommend investing in the stock market after both the company 401k match is fullfilled and a ROTH IRA account is maxed? When do you recommend investing outside of those retirement accounts and how should I go about finding stocks I like?
I assume I am missing something, but can’t figure out what…. maybe I am just not smart enough. but I keep hearing “.. start with a $50 investment, get a 6% dividend yield, and move up from there…” or similar statements. No one seems to be able to tell me in steps 1, 2, and 3 how to exactly do this. In reading articles like this, and researching for myself, I never see how to do this without fees and middle men who will also take their cut. I have been pointed to Bogle books which I am sure are very educational, but will they tell me steps 1, 2, and 3?