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How to invest on a low budget

Updated on October 05, 2010

HOW TO INVEST ON A BUDGET

Many people are intimidated by the prospect of investing as it seems very complicated. In fact, there was a time, not long ago, when investing was only for the wealthy. However, today there are various low-cost products available to the beginning investor, no matter what their social ranking is. Believe it or not, you can start to invest on a budget, and that is reason enough to grow your net worth.

Who to give your money to

One is stock brokers and the other is mutual funds. There is a big difference between these two. Both can offer similar services, but they specialize in a certain area of expertise. It is important to understand the type of service and the fees being charged in each case. Too often, investors jump into a situation in which they do not know how the investment company or adviser will be paid.

A stock broker acts as an extension of you, matching and researching investments that suit your needs and budget. However, the stock broker will charge a fee or commission for all his hard work that could put you out of a large chunk of cash you could have otherwise invested.

On the other hand, a mutual fund may not be as in tune with your needs, as they deal with large pools of money from investors and are also subject to risks, fees and expenses.

Keep fees low

When investing on a budget, it is important to keep your costs low. In doing so, you will end up with a lot more money down the road. The four fees you will encounter are account fees, commissions, loads, and expense ratios.

-Account fees - costs charged by the broker for managing your account

-Commissions - charged by the broker for trading stocks

-Loads - fees charged for buying or selling a mutual fund

-Expense ratio - the amount in percentage terms that the fund company charges as a management fee. There won't be a bill for this, but the cost will be built into the fund itself.

Prepare for retirement

When most people think of saving, they think of saving for a car or house with a savings account attached to the general checking account. Investment professionals, on the other hand, think of saving money in terms of savings accounts or a Certificate of Deposit. These financial accounts typically don't loose money under most circumstances and are great option for saving money long-term.

Investing, on the other hand, involves growing your money over the long-term. The money you invest should not be touched for years to come. This investment is your retirement money that will one day provide an income for you and your family. This money should be invested in a mix of stocks and bonds according to your age and risk tolerance.

When investing for retirement, you need to learn about the basic principles of investing. If you are new to investing, then chances are that you don't know a thing about stocks, bonds or mutual funds. Even if this is the case, don't worry. If you're young and just starting out in a career or have just graduated, stock investments might not be the best option. Talk to your bank about in-house savings plans or bonds that are secure with little to no risk, but still have the opportunity to grow over time.

Investigate suitable investments

Using the most cost-effective and simplified investments will make your life a whole lot easier. Many of these great new financial instruments are becoming more and more common. They are passively managed, index mutual funds and exchange-traded funds. These funds offer low fees and easy diversification, which means they spread your investments around to lower your risk.

An index fund is a type of mutual fund that is passively managed, as opposed to their actively managed cousins. These have lower fees because of the fact that they track a stock index.

An exchange-traded fund is a group of stocks, in either a sector or an index, that all trade as one single stock. These funds have even lower fees than index funds and are becoming very popular.

The most popular index is the S&P 500, which stands for Standard and Poor's. It tracks the largest 500 companies in the United States and, therefore, is a good barometer of the economy.

Investing may seem complicated and expensive, but there are ways to make the system work in your favor - and you don't need wads of cash to make it work either. And remember to always consult with a financial adviser before you make any financial decisions. With a little planning and common sense, you can invest on a budget with very little money up front and, hopefully, a large payout in the end.

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    • MrMarmalade profile image

      MrMarmalade 9 years ago from Sydney

      Some very good information there.

      Thank you

      Have a great Christmas and a happy New Year for 2008

    • sminut13 profile image
      Author

      sminut13 9 years ago from singapore

      thks lots. appreciate it.

    • profile image

      Richard Chan 9 years ago

      Very informative hub and also provide the pros and cons. keep it up. I also invested in equity funds once but in the end got burnt. My advice is not to put in your money until you are thoroughly familiar with the details and knoe how to analyse the results. Keep up the good work

    • sminut13 profile image
      Author

      sminut13 9 years ago from singapore

      i'll definitely take your advice. thanks lots for your comments.

    • profile image

      tanyawatson 8 years ago

      I agree, most people think of saving up for a car or something else instead of saving up for retirement. I've been thinking of taking son's cd's out of the bank and putting them into some good growth mutual funds. But my dad was the one that set them up so I'm going to have to talk to him first.

      Thanks for the article! :)

    • sminut13 profile image
      Author

      sminut13 8 years ago from singapore

      yep, people usually tend to think on a short term basis like a house or something though this might not always be the case. thanks to you too for your comment.

    • Sylvia Leong profile image

      Sylvia Leong 6 years ago from North Vancouver (Canada)

      Great overview! Most professions only earn enough money to live on & a little extra to save. It's so important to take those savings & invest properly. It's the only way to get ahead.

      I've linked your Hub to my Hub:

      http://hubpages.com/hub/How-To-Save-Money-Advanced

    • sminut13 profile image
      Author

      sminut13 6 years ago from singapore

      i so agree sylvia. will definitely be looking at your hub. i really need that advice.

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