It is almost impossible to live within your means when you’re a low income earner. Spending seems way easier than saving or investing and you probably feel you deserve much more than you currently earn.
With a low income or minimum wage, it can be a struggle prioritizing saving, investing, or any other financial priorities, over merely keeping head above water and “enjoying” that occasional weekend; but the truth is: “Savings and investments are your way out of financial hardship”.
How then do you begin saving and investing money on a low income? Is it really possible to build wealth and invest with a low income?
“The order of operations when trying to build wealth is important. You hear all this advice about what you should be doing with your money, but when you’re making minimum wage, you don’t have money to dedicate to all of those priorities at once.”
Sarah Berger, LendingTree
In her words, these conflicting priorities make up one of the biggest obstacles for any low income earner. How do you build wealth when you don’t know where to begin? What financial moves are the best to make when every dollar counts? Below, we have listed four steps you can take to start saving and investing money with a low income.
We have also arranged them in an order that will help you get the most out of each financial move:
- Establish a healthy emergency fund
- Pay off high-interest debt
- Build a retirement for the long-term
- Pay off smaller, low-interest debt
If you can tweak your budget, even by just a little, you can follow these steps to help you build wealth over time. We will elaborate on these steps and how they work throughout this article. Tighten your seatbelts and enjoy the ride!
How to save or invest with a low income
If you can live within your means, you should be able to save and still play big financial moves over time. The following order of prioritizing financial goals proves to be a perfect fit for most low income earners:
Establishing an emergency fund
The first action you should take once you begin earning money is to establish an emergency fund.
Emergency fund: Savings you build that can assist in covering cost implications from losing a job or receiving a reduced income, a medical emergency, a major car repair bill — in essence, whatever life could throw at you.
There are almost as many answers as there are financial experts to the question of how much you should have in your emergency fund. For some, you should start with a goal of #500,000, 3 – 6 months of expenses, or even a full year of spending.
It’s okay to start small and develop your emergency fund as much as you can afford to over time. Consider starting off with a savings goal of #200,000. Afterwards, challenge yourself to the next milestone that suits you best.
N.B: It is always best to build your emergency fund with a bank account that’s accessible, so you can have access to it when the need arises.
In addition to getting you financially prepared, emergency funds will help keep you out of more debt than you need to be in. It is a financial step that will keep you from falling into this gluey trap that’s the revolving door of debt.
Offsetting high-interest debt
Outline any debts you have. Include the interest rate, the balance, your monthly payment, and if available, what the current payoff amount is (You’ll probably need a calculator for this). Which of your debts have the highest interest rates? Offsetting these debts is your next financial move.
High-interest debt is the kind of debt that can add up over time and can be difficult to get rid of.
Your first step towards achieving this would be to focus on settling the debt that costs you the most money. Afterwards, you can shift your focus to the smaller debts. You should, as much as possible, avoid incurring more debt than you currently have. This will help you save, rather than continue offsetting debts.
Build a retirement plan
If you’re not developing a retirement account through your employer at this stage, you should start doing so. Where you can squeeze it into your budget, try to match, at least, what your employer contributes.
Even with just a few thousands being deducted from your pay, your retirement savings adds up.
“You might not think that you’re making that big of a dent in your retirement fund, but you want to allow your contributions to compound over time. The earlier you start, the better off you’ll be.”
Settle lower-interest debt
The last port-of-call on the list of financial priorities for saving and investing with low income is to offset your smaller, low-interest debt. Until you’re ready to aggressively offset these debts, just focus on paying your monthly minimum. These debts cost you the least amount of money, compared to the higher-interest debts you would want to pay off faster.
Although this list of financial priorities is not extensive and most likely won’t cover everyone’s unique financial situation, observing this order of financial goals is still a great place to start from when you’re planning on how to build wealth with what little money you are earning.
Low-cost, Easy Ideas to invest in with a low income
Are you simply on the lookout for ways to begin investing with what little cash you have stashed up? Not to worry, because, even if you don’t have a truckload of extra money to deposit in investment accounts, there are still options from which you can earn small returns and make your money work for you!
Trove (Nigeria’s first micro investing platform) is quickly gaining traction. You probably won’t get rich off it, but this is about building a healthy habit and allowing yourself to get used to it. Putting it simply, we think you’ll find it beneficial to get in the habit of investing and saving regularly.
Consider depositing any amount of money you intend to save in a High Yield Savings Account or CD. Although they have low returns, these types of accounts are often the most accessible. They are the lowest risk options available for you to put your money in.
If you intend to start investing but aren’t ready to dive in just yet, research on what investment entails using a Robo Advisor. For a little fee, Roboadvisors will automate a good deal of the decision-making in investing. This goes a long way to help beginner investors dip their toes in the water.
You should also consider asking your employer whether you can buy stock with the company. You just might be able to take advantage of discounted fees and special benefits.
Saving money and investing on a low income is really easier said than done. The financial goals listed above, however, will guide you towards focusing your money towards building wealth. They are also easier to achieve when you can live within your means and are not required to make tough choices as regards your money.
Financial stress is real. If you find yourself being anxious, fearful or angry as a result of the state of your finances, it’s tempting to begin comparing yourself with others or to even avoid thinking about your finances completely.
You might be making big sacrifices while someone you know is on their fourth vacation this year. However, simply focus on what you can change. Managing money is hard, irrespective of the income level, but it is even much harder when you’re not earning what you feel you deserve or what would fill your needs.
Income can easily feel like a status symbol that distinguishes us from others. Remind yourself: Success is what you define it as.
You decide what deserves priority in your life; money simply gives you more options to live that life. Making smart financial decisions at whatever your income level is now can ensure that you live out the life of your dreams! Cheers!
Derin Phillips is a financial and investment manager, CEO of Wavis Investment Ltd and an astute business leader with over 10 years of professional experience in developing and implementing business growth strategies, engineering process optimization/operational effectiveness and championing healthy financial decision making.