Investing is hard enough on its own. But when you’re earning less than the median household income, which was $63,179 in 2019, it’s even harder.
When it comes to investing on a lower income, there’s little room for error. A few months might go by without any surprise expenses coming up, allowing you to finally save money.
But then disaster tends to strike, and you’re back to where you started — or even behind where you started.
This post covers some of the most important information about investing for beginners, using a $50,000 salary as a baseline.
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#1. Find The Money To Invest
The more money you invest, the more you stand to gain. Finding that money to invest, however, can be difficult. And many people wonder if just investing $50 a month is even worth it.
Focus On Cutting The Big Costs
Frugal living tips are helpful, but only to a certain extent. The main problem is that each tip you implement provides diminishing returns; once you’ve reduced some of the larger living expenses, like the ones mentioned below, it starts becoming a game of saving a few dollars here and there with a lot of effort.
For the quickest results, focus on the big expense categories:
- Housing. There are a lot of factors involved with housing but the end goal is the same: spending a reasonable amount that will allow you to save money. This goes for whether you rent or own. If you do own, the easiest way to lower your housing expenses is to refinance your home. Other than that, you’re looking at moving to a lower cost-of-living situation. Over the long-term, finding a lower cost-of-living situation is ideal — but there are obviously many reasons why this isn’t always possible.
- Transportation. The cost of owning and operating automobiles is taking up an increasingly large portion of the average American’s budget. One of the biggest reasons is the popularity of SUVs and trucks, which now have over 70% market share. And while I love a great truck, they’re much more expensive than sedans.
- Food. If you’re spending hundreds of dollars each month eating out, there’s significant opportunity for savings here. On the other hand, if you’re cooking all but a few rare meals at home, there’s much less. However, it’s still important to run down the best practices for saving money on groceries, as this is one fixed expense that doesn’t go away. And eating healthy on a budget is easier than you might think.
- Education. As with your home, refinancing student loans is one quick way to save money on education expenses. But then again, it’s not always the best move, as refinancing federal student loans to private loans may waive your access to valuable benefits like income-based repayment plans and debt forgiveness. Long-term, it’s important to be smart with education expenses and make sure the return on investment is there.
Know The Gap Between Your Income and Expenses
Next, it’s important to get realistic about how much you can save each month.
This requires knowing:
- The amount of money you make every month (your take-home pay).
- The amount of money you spend every month.
The difference between these two numbers is what you can invest.
As you’re investing on a lower salary, the difference may not be substantial. Nonetheless, it’s important to know what that difference is.
You can use one of the many free budgeting apps to get this information easily. My favorite is Truebill, as its simple design allows you to easily see your income and expenses in any given month.
Going forward, you might want to stick to a strict form of budgeting, such as zero-based budgeting or the cash envelope system, to make sure every dollar you earn has a job.
The objective here is to get a starting point for how much you can actually invest. Looking at your income and expenses over the past three months will no doubt give you some numbers to work with.
To start, invest the average difference between your income and expenses over the past three months. In the example below, that would mean investing $449 a month.
| Income | Expenses | Gap | |
| Month #1 | $4,166 | $3,500 | $666 |
| Month #2 | $4,166 | $3,750 | $416 |
| Month #3 | $4,166 | $3,900 | $266 |
| Average | $449 |
#2. Identify The Best Use Of Your Money
When I started investing, in my early 20s, I assumed that it consisted only of investing in stocks. After all, I wanted to make the big bucks fast — even though I only had a few hundred dollars in my investment account.
But the more I learned about personal finance and investing, the more I expanded my view. I came to realize that the primary goal of investing is to achieve a long-term positive outcome.
As such, let’s start looking at some of the different ways to invest.
Building A Small Emergency Fund
If you don’t have at least $500 of cash saved up, I’d label this as your best investment.
While you’ll eventually want to save more money for a rainy day, getting at least $500 set aside is the first step to stop living paycheck to paycheck.
After all, it does you no good to invest in anything if next month you have to sell that investment at a loss to cover an expense you didn’t see coming.
Here’s a step-by-step guide that explains the purpose of an emergency fund, why you need one, and how to build one quickly.
Paying Off High-Interest Debt
Once you have $500 saved up, you can begin to focus on other financial goals that will move your life forward. And one of the best returns you’ll ever get on your money is paying off high-interest debt.
The stock market returns around 7% or so per year. High-interest debt, such as credit card debt, has an average cost of around 18% per year. So eliminating that high-interest debt produces significantly higher returns.
It’s also worth mentioning that when you pay off this debt, it’s a guaranteed rate of annual return; you will save 18% (or whatever your APR is) — no ifs, ands, or buts about it. That’s a level of certainty that no stock market investment can offer.
Recommended reading: How To Get Out Of Debt Fast (The Science-Backed Way).
Building Your Career Capital
One article that has really stuck with me over the past year is “The Poverty Myth,” which was published by the blog Of Dollars And Data.
In a nutshell, the article correctly points out that most lower-income earners are spending over 100% of their income on necessities.
And therefore, as the author states:
“It is clear that getting out of poverty and building wealth will be driven more by income than spending.”
For someone on a lower income, improving your future earning potential should be a very high priority. Additionally, the younger you are, the more you stand to benefit from growing your ability to earn more income.
Of course, increasing your income is a lot easier said than done. For some people, this might mean investing in a credential that can help you land a better job or a promotion, or to garner an increase in salary. For others, increasing their earning potential comes down to adding key skills, as well as investing heavily in building relationships.
There’s no straightforward path here for everyone. That said, the best framework and thinking I’ve found around the subject is the concept of increasing your career capital.
401(K) Match
When it comes to traditional investing — e.g., putting money in the stock market and watching it grow — there’s no better investment than a 401(K) match.
If your employer has some type of 401(K), look to see if there’s an employer match. This is the closest thing to free money you can get.
Most employers will match up to a certain contribution amount. A common formula is matching 50% of your contribution up to 6%. Therefore, if you contribute 6% of your salary, you can get an immediate 50% return on those funds.
If you don’t have a 401(K), consider opening a Roth IRA or a traditional IRA. These have similar tax advantages as an employer-sponsored account, with the main difference being that you open them on your own.
While I love Vanguard and invest with them, they tend to have higher minimums to get started. A great alternative is to invest with a low-cost robo advisor like Betterment, which allows you to open an account with just $1.
Financial Goals
At the end of the day, you need to make personal finance personal.
Maybe you want to start having kids next year, and this year might be the last chance you have to travel before your family begins to grow. Maybe what’s most important to you is having your own home, and you should therefore prioritize saving for a down payment on a house.
There is a wide range of investment options and financial goals that can improve your quality of life, and identifying the best use of where you should be investing your time and money is time well spent.
For help with this, download our free financial goal setting workbook below.
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#3. Investing The Right Way
Once you’ve identified how much you can save each month, as well as the best use for your money, it’s time to actually start investing.
Most people skip the above two steps and end up without a sustainable long-term plan.
This part of the process will look different depending on your goals. So let’s go over some best practices for a few different situations, focusing mostly on starting to invest in the stock market.
Developing Good Investing Habits
The goal isn’t to make investing some one-off event you do this month but not the next. Instead, the goal is to turn investing into a habit. And, ideally, into a habit that allows you to invest a percentage of every dollar you earn.
“[…] good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time. That’s when compounding runs wild.”
– Morgan Housel, author of The Psychology of Money
The primary reason that many Americans’ homes are their largest asset is not because home ownership is a great investment. Rather, it’s because home ownership forces you to save. Each and every month, you have to make that payment — or else there are negative consequences. At the end of that payment process, you end up with a valuable asset.
It’s important to apply this same concept to investing. You don’t want to wait to see how much is left over to save at the end of the month. Instead, you want to force yourself to save at the beginning of the month by paying yourself first.
An example of this is investing through a 401(K) match, where the withdrawal is automatic.
If your best investment at the moment is an emergency fund or other short-term savings goal, you’ll want to set up an automatic transfer from your checking account to a savings account.
Related: How To Manage Your Money In Five Simple Steps.
What To Invest In
For shorter-term goals, such as saving for a car or a house, you’ll want to keep most of your money in a high-interest savings account.
While the stock market averages about 7% per year, returns can vary widely in any given year. As such, avoid putting money earmarked for short-term goals into the stock market. If you need to withdraw it, you may end up having to sell your investments at a loss.
When it comes to investing in stocks, a wide body of research shows that you’ll earn a far greater return by investing in the market as a whole rather than by picking individual stocks.
This is often referred to as index fund investing.
Index funds are designed to simulate the performance of the market as a whole. For example, an S&P 500 index fund consists of the 500 largest companies in the United States. As a holder of the fund, you’re investing a small percentage in each of those companies.
Note: Index funds are not the same thing as exchange-traded funds (ETFs). You can learn more about the difference here.
If you’re investing in your 401(K), you may want to choose something called a target date fund. These funds are likely made up of different index funds and adjusted for risk tolerance based on your “target” retirement age.
If you’re investing outside of your 401(K), such as in an IRA, some brokerages allow you to invest in an index fund portfolio that’s optimized for your goals, such as what Betterment offers.
A simple strategy like this allows you to focus on how much you invest, either by cutting costs or increasing your income, rather than constantly worrying about whether you’ve picked the right investments.
