4 Tips for Low-Income Investors
Investing might seem out of reach for many workers -- new grads and otherwise. The average salary in the United States was $44,322 in 2012, and this leaves out unsalaried workers, according to the Social Security Administration. Many entering the workforce for the first time have multiple part-time jobs at an hourly wage, and they face crushing debt loads -- an average of $27,253 -- in addition to daily expenses. In this climate, it can be hard to even consider investing, though it's more important than ever. Traditional low-risk vehicles for low-income earners, like savings accounts, can no longer keep up with inflation in the long term. With this in mind, how can you invest and still pay your rent?
Watch out for fees and minimums
If you're on a strict budget, make sure you're not wasting the amount you can afford to invest. First, look for brokerages or funds that have a low minimum initial balance, ideally $0. Take a look at OptionsHouse or USAA, which both have a $0 minimum initial deposit. The funds you'll purchase might have their own minimums, though.
Once you've narrowed your options, research the fees at your prospective brokerage or fund. You can work around a high minimum by using your tax refund -- or other unexpected cash -- to open an account, but your ability to pay high fees won't change in the short term. Watch out for these fees:
Inactivity Fee. This fee penalizes you for infrequent trades. In some cases, you need to trade only once or twice per year to avoid it, but some brokerages require more. IRAs are usually exempt, but might have their own maintenance fees.
Account Transfer Fee. This is the amount you're charged to move your account from one brokerage to another, or to close it altogether. Sometimes, your new brokerage will reimburse you, but not always.
Expense Ratio. This covers your fund's operating expenses throughout the year. It's expressed as a percentage, and you should avoid any funds with fees higher than 2%. You can often find good index funds that charge about 0.10% and actively managed funds that charge 0.75% or less.
These are only a few of the fees you might encounter. If you're ever unsure how much a fund or firm will cost you, don't hesitate to ask -- it's better than being surprised later.
Invest in index funds
Index funds are mutual funds or exchange-traded funds that are based on consistent rules. They might match the performance of a specific index -- like the Nasdaq or Dow Jones -- by incorporating shares of each participating company, or track a kind of security, like corporate bonds or foreign stocks. Because they lack a fund manager, index funds are considered "passively managed." This benefits investors in two major ways:
Performance. Though the point of actively managed funds is to beat the market, according to a study by NerdWallet, only 24% of active managers beat the market index. Index funds actually offer better after-fee returns.
Cost. Because passively managed funds don't have managers to pay, their expense ratios are much lower than actively managed funds.
Sign up for a Roth IRA
Saving for retirement is very important. Unfortunately, if you're working a low-wage job, you might not have access to a 401(k) and the all-important employer match. This makes an Individual Retirement Account -- preferably a Roth IRA -- a must. Unlike contributions to 401(k)s or traditional IRAs, money that goes into a Roth has already been taxed at your current low rate. This means you'll pay low tax on the money going in, and none at all when you withdraw funds during retirement.
Budget, then automate
Once you've made your initial investment, you can arrange to have small amounts -- even $5 or $10 -- regularly deducted from your checking account and moved to your brokerage account. Take a close look at your monthly expenses. Could you eat one less meal out every month, so you can invest the savings? Cut down on your data use? Drink one fewer latte? Now that you've budgeted a monthly investment, automate it. But don't forget to also save in an emergency fund. The money you're investing won't do you much good if you're constantly drawing on it to pay for unexpected expenses.
The bottom line
It doesn't require tremendous wealth to become an investor. With time and patience, anyone can invest to achieve financial goals. Don't look just at brand-name brokers; also consider opening an account with a discount broker, which often offers the same service as the brand name, but for less money. Some brokerages also offer promotions like free stock trading, but keep in mind these offers expire at some point, so read all the fine print.
If you're planning for retirement or another milestone, you might benefit from professional help. Consider scheduling a meeting or two with a fee-only financial planner, or choosing a brokerage with free or low-cost broker assists. This way, investing can be affordable and manageable, even with a busy schedule.
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