How to invest even if you’re treading water financially


A 20-something acquaintance of ours recently received an inheritance of a few tens of thousands of dollars from an aunt unexpectedly. Naturally, all of us were very happy for her, and it wasn't long before I asked what for me was the obvious question: “So, are you going to invest the money?”

She looked at me as if I wanted her to bet on the frog from Calaveras County: “What? And lose it all?”

It's not easy to shock an old man, and I'm certain she didn't mean to set my head to spinning. But her reaction left me pondering — why do people equate investing with devastation? She is not the only one.

Excuses — the reasons not to invest

She doesn't strike me as the literary type, so I doubt that she's ever heard Mark Twain's famous quote about investing:

“OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.”

It's surprising how many people who have never heard of Mark Twain say the same thing about investing in general. Those that have often cite the quote to justify their choice not to invest, frequently adding (with a sage nod of the head) that Twain went bankrupt in his late 60s … because of bad investments.

Others don't invest for reasons more basic, such as not having enough left over at the end of the month to invest. I used to proclaim that as my excuse too. In my case, that is all it was (an excuse) because we had more than enough money considering that I was the CFO of a successful company at the time.

For others, especially in today's economy where well-paying jobs seem to have disappeared with California's water, it is more true than it is an excuse. A cynic may scoff and say it's because Starbucks and smartphones are getting more expensive; but when you're a single parent faced with rising food prices and no raises, the issue is very real.

Investing despite limited resources

When you are treading water financially, it is the most valid of questions: How do I get started investing when I have so little to invest?

1. Realize and accept.
When I turned 50, I realized my folly and (as documented elsewhere) sprang into major catch-up mode. And that, I discovered, is the first and most important step to long-term financial success — realizing that none of us have any choice. You will have no long-term financial security if you don't invest.

This is a mindset and nothing more. I have seen people making half a million dollars not get by. (Warren Sapp, Hall of Fame football player, filed for bankruptcy recently, despite that he was making $45,000 a month.) I have also seen people making little more than minimum wage save and invest.

Some may remark, “Well, it's easy for you to say; you don't know my circumstances,” but that is still an opinion. In reality, it is possible for anyone to invest no matter their income. It doesn't need to be fancy. Investing can start with a humble savings account.

It might not be easy, or anything resembling easy, but it is always possible to invest — it's a mindset.

2. Spend less.
When you are treading water, chances are there already are many things you feel you need just to get by, and to hear someone say “spend less” can feel a lot like a drowning person being thrown a jug of water to drink: “Here, drink. You need this.” I know, because there was a time I needed to hear it too — and I didn't want to either.

Nobody is saying spending less is easy, but that doesn't make it impossible. What did it for me was a friend who went to Mozambique to start a ministry among the poorest of the poor.

I was unemployed at the time and feeling a bit sorry for myself. However, when I heard how little those people have to get by on every day, it opened my eyes and forced me to admit that, no matter how much I complain, I still am way better off than those folks, and I still have a lot I can cut before I get there.

Unless you get unexpected windfalls, like an inheritance, the hard truth is that spending less is probably the only way to free up some money to invest.

3. Don't despise small beginnings.
The first steps in any endeavor are humble. Gustave Eiffel, famous today for his tower in Paris and the Statue of Liberty, started as an unpaid assistant in a foundry. Setting aside $10 a month might feel meaningless: “What difference can that ever make?” That's wrong. It makes a difference in many ways:

  • It breaks the ice. You'll never again wrestle with the question: Should I start?
  • It forms a base: It is easier to add a dollar to an existing savings account than it is to start with just one dollar.
  • It creates a habit.
  • And best of all, it sets in motion the power of compound interest.

4. Form good habits.
Mahatma Ghandi said:

” Your words become your actions,
Your actions become your habits,
Your habits become … your destiny.”

Scientists argue over how long it takes for something to become an automatic habit, but what they all agree on is that we can pretty much make anything a habit if we are committed to it. Once you do good things without having to wrestle with the question every time, your life becomes better. Living below your means and saving the difference can become a habit. My neighbor Jim became a millionaire with good habits like those, despite never earning an over-sized income.

5. Fight lifestyle inflation.
They may be small, but most people get a raise or two somewhere along the line. And when they do, most people use that good fortune to buy better cars, bigger homes, nicer clothes, and to eat at better restaurants. After all, this is how all that hard work pays off, right?

Wrong. That is called lifestyle inflation, and one of the keys to long-term financial success is to recognize this temptation for what it is: a short-term pleasure with a long-term cost.

It may not be your current job or employer that gives you a raise; but along the way, opportunities to make more do come along. So determine now to maintain the lifestyle you have proven you can get by on and invest your raises instead of spending them.

6. Save the windfalls.
Along life's way, we all get unexpected windfalls. They may not be as big as our friend's example above. More likely they will be things like refunds, rebates, credit card rewards, bonuses, incentives to open certain types of accounts and that type of thing.

When the amounts are small, simply put them in a savings account. Then, on your birthday, take them all and invest them by buying an index fund or something like that. You can even put the word out that you would like to make that birthday gift to yourself as big as possible (instead of receiving another pair of socks).

Again, it's about developing the mindset and the habit to transform life's little windfalls into future big windfalls through the miracle of compounding.

7. Pay yourself first.
I don't know about you; but when I had the mindset of “I'll see what's left over at the end of the month and maybe invest that,” there never was anything left over. Funny how that worked.

What usually happened was, around the third week of the month, a friend would crawl out of the woodwork and suggest we go to a theme park, restaurant or something like that. “Come on. Life's too short not to do this!” We'd look in the checking account and see, “Oh, nice! There's some money. Let's go!” But then, come the end of the month, the account was as bare as Mother Hubbard's cupboards.

By far the better thing to do is to make your monthly savings or investment the first or second thing you pay (after the rent). That way, when the money is gone, it's gone — and when that spendy friend comes along, you can look in your account and say, “Hmm … maybe next time.” (Meanwhile, you are making progress toward your long-term financial goals!)

Not easy, but certainly doable

When you're treading water, investing is not easy — let's just state the obvious. However, that doesn't mean that it's impossible. Given that none of us can count on a secure, long-term future without it, the question has to be not whether to invest, but how.

Have you been successful investing on a small income? How did you do it? If not, what is holding you back?

More about...Budgeting, Investing

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Ali @ Anything You Want
Ali @ Anything You Want
5 years ago

I started investing right out of college on a very small income. I agree that just starting is important. There are so many things to learn, so much terminology, that it can seem very scary and overwhelming. The risk is also concerning, as you don’t want to lose your hard earned money.

Reading about the power of compound interest really helped me. I saw how $1,000 invested when I was 22 could turn into a substantial sum by retirement and I wanted a piece of that!

lmoot
lmoot
5 years ago

I kind of get why some people are leary of traditional inveesting, especially young people who’s greatest or only association with investing is with the recession. I think one way to help “cure” the fear is to educate people that stock investing is not the only, nor primary form of investing, like so many financial-ese like to push. Investing could come in the form of education, or starting a business, or a trade. Of course spreading the risk is almost always more beneficial, but I think shifting the perception that investing only comes in a passive form, to the idea… Read more »

Laundry Lady
Laundry Lady
5 years ago

I agree with starting small, but I also don’t think that saving and investing aren’t the same thing. Whenever we get a windfall it’s hard for me to think about putting it into the market because we’ve seen so many lose to much in the past. Pay off debt, absolutely. Savings account, sure, though the current interest rates don’t create much of an emotional payoff. (I never thought I’d look back fondly at 3% in my savings account). So when those windfalls come and it’s a choice between doing a small renovation or upgrade on our house that will improve… Read more »

PJ Ryan
PJ Ryan
5 years ago

I graduated less than a year into the recession, so non-retirement investing terrified me. I had to completely change my attitudr towards money before I felt comfortable. Once I got my monthly expenses under control and had an emergency fund in place, I could say to myself, “Money is just a tool to create more money, and the way to do that is through investments. I have an emergency fund, I have my income, and if all of my investments fail, I will be fine. I don’t need it right now, and I can always make more money.” My only… Read more »

Dave
Dave
5 years ago

Great post, William!! I hadn’t heard the news about Warren Sapp, but that really drives home the point.

An (unexpected) landfall of cash, or even a million dollar a year salary, adds nothing to wealth if you spend it. All folks should remember the real measure is not how much you earn (or inherit, as in your friend’s case), but how much you KEEP.

Sanjeev Shrestha
Sanjeev Shrestha
5 years ago

William, Thank you for this article. I always love your articles because you emphasize people to save and invest and also how to invest. I first started investing when I turned 35. I knew investing was right thing to do but somehow I always procrastinated. Initially, I started with 10 percent of my income. But now after 8 years later, I am investing about 35 percent of my income. My wife was initially very hesistant like me. But now, she is the one who always reminds of saving/investing has been done before spending. “Pay yourself First” is the MAGIC BULLET.… Read more »

Joey Craig
Joey Craig
5 years ago

I agree about starting small and forming habits. Even if you aren’t making a lot of money, it is a smart idea to slowly set money aside as you can. It is a good idea to get into the same habit of saving money so that way you don’t slowly end up not saving any money at all. For example, whenever you get paid set aside a certain dollar amount for savings right away.

Nick @ Millionaires Giving Money
Nick @ Millionaires Giving Money
5 years ago

I had a very similar mentality in my early 20’s because there’s so much doom and gloom not to mention the horror stories that are associated with investing. Success is seldom highlighted and failures are over-exacerbated by the media. Eventually I was able to change my mind by investing in personal finance books and looking at past performances to determine cheap index fund where a great way to invest if you have the patience. Great post William, thanks for sharing.

getagrip
getagrip
5 years ago

When each child was born I put $25 a paycheck into their college funds. That’s $650 a year per kid. I caught the “what the heck will that amount to” attitude from a few folks. Some were like, “just take that little bit out of pocket when the time comes” or more often “that won’t even pay for books in twenty years.” Even if I had left it at $25 a paycheck and never added to it, that’d be $13K in today’s dollars (ages 0-20), enough for a small used car ($2K), two years of car insurance ($2K), and two… Read more »

Donna Freedman
Donna Freedman
5 years ago
Reply to  getagrip

Another strategy I’ve heard: If you’re on a really, really tight budget then just save your kids’ ages. That could be per week, per pay period or per month. Example: You have a two-year-old and a five-year-old. Set aside $2 and $5 per week (or whatever). Doesn’t break the budget and it’s easy to maintain because it increases by just $1 per year. That money could build an emergency fund and THEN you could start funding college. As you note, the naysayers who say it won’t amount to anything are wrong. It WILL amount to SOMETHING — maybe not as… Read more »

Peggy
Peggy
5 years ago
Reply to  getagrip

Love it!!! Thank you.

PJ Ryan
PJ Ryan
5 years ago
Reply to  getagrip

Honestly, I had to reply to this to say that I love it, and it’s so encouraging! Thank you for sharing it! I’m in my 20’s right now and just bought a house. Sometimes it feels like we’re not making as much progress on our (non-retirement) investment goals because something always comes up – another house repair, the dog gets sick, etc. However, we have a small automatic withdrawal setup to our Vanguard each month. Sometimes family members or friends say that people on our income can’t ever become rich so we shouldn’t even bother. It’s so encouraging to hear… Read more »

Debi
Debi
5 years ago
Reply to  PJ Ryan

Keep that attitude! Don’t listen to the naysayers. You’re doing great. A trick I use to increase my retirement savings is to to increase my contribution everytime I get a raise. If I got a 5% raise I raise my cotribution by 2% or 3%. Try even 1%, the amount you contribute is pre-tax so it is really very painless yet very effective over time.

Jerome
Jerome
5 years ago

For us the key to becoming financially independent (which we are since 8 years) was developing the right habits. If we have a windfall, I will save it. Period. And than invest it. In the stock-market because it turns out that that is what I am best at (but still not very good). I tried rental property and hated it. And I tried mutual funds and treasuries and I hated them. But I love the stock-market. To each his own. The present situation is that almost 60% of our net-worth comes from the profit of our investments, and the rest… Read more »

Linda Vergon
5 years ago

(This comment came from Charlotte, a reader of our daily newsletter.)

I hope you will read this! Lots of sound advice- I know because it has worked for me!

Alex
Alex
5 years ago

I always enjoy the posts on this website and found this one to hit me very personally. My family has never been great with money, let alone investing, but after starting to invest I became addicted. I wanted to add this comment as additional encouragement to start investing, specifically towards the younger audience (I am currently 20). At first I was, honestly, worried about what would happen to my money. I had no knowledge of how the stock market worked and had been keeping my small sum of cash in a savings account with .01% interest — losing money monthly… Read more »

Mysticaltyger
Mysticaltyger
5 years ago
Reply to  Alex

You might want to check out the http://www.dividendmantra.com blog if you haven’t done so already. It’s a really great site for those interested in investing in dividend paying stocks.

Jason Wong
Jason Wong
5 years ago

Great article. I think another important thing for people to be aware of in the world of investing is ‘time in the market, not timing the market’. Some of my friends don’t invest just purely because they want to pick the bottom of the cycle. They hold, and hold while the price keeps going up and their target price gets even further which means it only gets harder to actually start investing. Like your article and your readers suggest, starting with small beginnings and investing over the long term will eventually give good returns even when one is treading water… Read more »

A K
A K
5 years ago

its amazing that almost nobody even you don’t talk about dividend reinvestment plans, anyone can start investing for as little as $25 dollars for free or minimum transaction fees in the bluest of blue chip American companies by DRIP investing. I would encourage any and everyone to go to your favorite big companies website and their investor relations page and get started with them or thier share transfer agents, then set up automatic monthly investing for 25, 50, 100 or whatever you can afford on the first of the month or as soon as you get your first paycheck of… Read more »

John
John
5 years ago

We have a pretty good savings stashed away for emergencies and also a sizable amount in our 403(b)s, but that still doesn’t stop me from investing a few dollars ($10 per person) in our Roth IRAs. Every little bit helps. Plus I have more control of where I invest in my IRA than my 403(b). I know I’m being taxed on the money I use for the IRA, but it’s a small amount and it’s easier to stop than the money going into my 403(b). Great post!!

Ely
Ely
5 years ago

I’m still baffled every time I hear someone compare investing to gambling, or assume that to invest means to lose everything. It strikes me as the height of ignorance. I’ve been investing in the stock market since I was 22. I’ve NEVER picked stocks – except for a little fun-money account – but have always been in funds, mostly index funds nowadays. When I was younger I couldn’t always add to my savings but my original contributions were still there growing. Now I pay myself first, putting pre-tax money in my 401k and after-tax in a Roth. I have a… Read more »

Mysticaltyger
Mysticaltyger
5 years ago

I don’t get this “investing is gambling” mindset either. It drives me crazy. You don’t have to be 100% in stocks. You can but a mutual fund that has bonds in the mix so that it’s not such a wild ride. I always recommend funds like Vanguard Wellesley Income to scaredy-cats. 60% investment grade bonds & 40% dividend paying stocks. The worst year it’s had in its 44 year history was 2008, when it lost just under 10%. Sure, you shouldn’t use it as a savings account, but it’s a solid fund for those who have an “investing is gambling”… Read more »

Jay
Jay
5 years ago

Warren Sapp filed for bankruptcy in 2012. I don’t know if I’d consider that recent.

Mysticaltyger
Mysticaltyger
5 years ago
Reply to  Jay

Who is Warren Sapp?

Kyle
Kyle
5 years ago

There is definitely a major fear in most people about investing. They also generally refuse to research the topic. I make OK money now and didn’t invest before so I can’t comment on investing with minimum wage but I’ve always had plenty of money no matter how little I’ve made. It’s a mind set like you say. “You will have no long-term financial security if you don’t invest.” This hit home with me as I wrote about it June 9th.

William @budgetsqueeze
William @budgetsqueeze
5 years ago

For people with tight budgeta or without the natural discipline to budget, I highly recommend automated savings and investing. I like the keep the change program at Bank of America and I especially like the acorns.com for beginning investor’s or as a supplement to a primary investment account. Both of these programs are built on leftovers of dollar purchases.

Harry King
Harry King
5 years ago

Investing is a risky business, it could make or break you. It is best to have a post like this to help guide us with our investing options. We can never be too sure about what the future holds, but being financially stable can secure you.

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