Investing isn't just for the wealthy. If you have a few thousand or even
less than a hundred dollars saved, here are some suggestions on how to
make the most of it.
Steps that can be taken :
- Set aside as much as you can for investing. Do this first and foremost, even if you can only set aside a few dollars out of every paycheck at first. Even $5 per week will add up to an additional $260 per year. Try to cut your costs of living and live far below your means.
- Next, decide whether to invest more or pay off any high interest debt and build up an emergency fund first. Will the expected rate of return for your investments exceed the interest rates on loans you may have? See How to Decide Whether to Invest or Pay off Debt.
- Before you invest, read widely! You need to understand what investment options you have, how to read financial statements, how to analyze stocks (quality, valuations, financial strength, growth, etc), how to avoid investment scams and pitfalls, and where to find information. Warren Buffett, one of the most successful investors ever lived, had read every book related to stocks or investing he could lay his hands on (at least 100 books according to him) before he turned twenty.
- Promise yourself that you'll keep your costs of investing (fees, commissions) to less than 2% of the transaction value, no matter how much you're investing. Multiply the amount you have to invest by .02. If the trading cost is more than that, put your money in a savings account instead until you can find an investing opportunity with a better ratio.
How to Decide Whether to Invest or Pay off Debt
Whether it's a mortgage, personal loans, credit cards
or all of the above, more and more people are drowning under the burden
of their debt, and for those with enough income to keep their heads
above water, the only logical choice may seem to be paying off their debts
as quickly as possible. But wait -- is that really the best financial
game plan? While it certainly feels good to be debt free, in some
extremely rare situations you may be better off simply maintaining your
debts (i.e. paying the minimum payments on your loan) and investing
your spare cash. Can't decide whether to invest your extra money or use
it to pay off your loans? Read on for some tips to help you make the
choice.
STEPS :
- Start a budget -- a spending plan. Before you can even consider investing, you've got to make sure that you actually have extra money. Reserve enough income to keep all your debts current; getting behind on your debt payments can damage your credit and cause you to incur fees that will quickly overwhelm the return on any investment. Pay at least your minimum payments on all your debts, on time, every time.
- Build a rainy day fund before investing. Things may be looking up now, but what if you lose your job next month or you have a medical emergency? Before you invest or make larger than necessary payments on your loans, save up some money for an emergency fund. Many experts recommend that you save enough to cover at least three months of your bare-bones expenses. This number may vary, however, depending on your situation and your personal preferences. This money should be in a safe, accessible account, such as a money market fund, not a mutual fund (no guaranteed return over short periods of time) or a CD (not accessible).
- Think of debt payments as an investment. When you make a $100 payment on a loan with a 13% interest rate, your annual return is 13%, or $13. Why? Because you avoid having to pay that extra $13 in the future, which leaves you $13 more than you would have otherwise had.
- Prioritize your debts. Some financial experts suggest putting your debts in order from those that charge the highest interest rates (often credit cards) to those that charge the lowest (typically mortgage payments). Others, like Dave Ramsey (in his book Financial Peace Revisited), suggest listing them from smallest to largest, paying off the smallest debts first while making minimum payments on the rest. Then, as the smallest debt is paid off, the amount that was being paid on it is rolled up onto the next highest debt, added to that debt's minimum payment. This cool trick is called the "Debt Snowball," and can give a tremendous sense of accomplishment and encouragement to anyone with a large number of debts to pay off.
- Compare the annual return on investments to the interest rates on your debt. When examining an investment opportunity, compare its rate of return to the interest rates on your debts. Suppose you're trying to decide between paying off your mortgage early by paying an extra $100 per month, or investing that $100 each month. If your auto loan's interest rate is 6%, you can get a better return by investing that $100 in any investment that yields more than 6%. If you're considering a bond that pays 5%, however, you're better off paying the extra $100 on the loan. Also ask yourself if you would borrow new money at the debt rate to invest at the investment rate. If you wouldn't borrow new money, you should pay off the debt before investing.
- Consider the tax implications. It's not enough to simply look at the interest rate you'll receive on an investment or pay on a debt. You also need to consider whether the interest on your investment is taxable and whether the interest on your debt is tax-deductible. Taxes can complicate things a good deal, so unless you are confident in your ability to navigate the maze of tax laws and do your own calculations, you may want to get expert help from a financial advisor. Consider the following U.S.
- Pay off debts that have higher interest rates than the return you can get on investments. There's a good chance you can find a relatively safe investment that would pay more than the interest on a low-rate mortgage. It's quite a bit harder, however, to find an investment that offers a better return than paying off your 21% credit card balance without an amazing degree of risk, (unless someone's paying you to invest -- see the tip below). Thus, with your prioritized list of debts in front of you, use your extra money to pay off those with the highest interest rate first. Another strategy is to pay off any small balances first (even if they have low interest rates) which frees up cash flow for investing or for paying off your other debts.
- Invest only when you can reasonably expect returns that significantly exceed the interest on your debts. Eventually you'll have paid off your high-interest obligations and likely be able to find acceptably safe investments that will provide a better return on your money than paying extra on your lower-rate debts. At this point, it generally makes sense to invest, rather than pay anything over the minimum payments on your loans.(http://www.wikihow.com)








