Or maybe you just want to start with a tiny amount.
Well, in reality, there are actually quite a few investments that you can make with a low income.
It is simply a matter of knowing what those opportunities are and understanding how to invest your money. This article will provide you with the information that you need to get started.
How to Invest A Small Amount?
The first thing that you will need to understand is how to invest if you aren’t earning a lot of money.
Most individuals who are earning minimum wage will often emphasize on the lack of funds as a major barrier to investing.
Now, while you may not be able to invest a large quantity of money in the beginning, it is quite likely that you do have more to offer than you can imagine.
One way to determine this is to look at how much you spend each month.
Don’t forget your expenses
There are, of course, essential expenses that you just can’t ignore. These include rent, utilities, groceries, and similar requirements. At the same time, once you look through your expenses, you may find that there are certain activities that aren’t all that practical. For instance, perhaps you eat out quite a lot or engage in leisure activities each weekend. By reducing such events, you will find that you are left with additional money to invest.
For the sake of argument, let’s imagine that you really don’t have any money to spare as you live rather frugally. In this instance, it is all about saving up until you have enough to invest.
So, put away whatever extra money that you can, even if it is just a few dollars every week or month. You will find that, within a short period of time, you will have been able to accumulate quite a bit. You can then invest this amount.
Finally, you need to find a broker that is able to accommodate your particular budget. While there are a number of brokers to choose from, their brokerage fees alone may prevent you from making a profit. This is why you need to make certain that, when totalled, you can afford all of the charges.
Also, you may want to opt for an online broker rather than a full-service one. While full-service brokers offer you a number of advantages, they can also be rather costly to place a trade with. As a result, you may end up investing loss or placing fewer trades. To avoid this situation, always go for a discount broker that you can afford.
Best Micro Investments in Australia 2022
You are now aware of how much money you need to get started. So, let’s move onto the best type of investments you can make if you are a low income earning Australian:
1. Exchange Traded Funds
When you only have a minimal amount of money to spare, it can be difficult to invest in more than one venture. So, not only can you expect lower profits, but you will also not be able to diversify your investments. The solution to this problem is exchange-traded funds or ETFs. Here, your money is collected along with other investments in a fund. Online trading platforms like etoro and plus500 offer these kinds of assets.
Then, a fund manager will use this money, collectively, to invest in different areas.
ETFs often have a low entry point which means that you shouldn’t need too much money to join one. Also, after you have joined an ETF, you also have the opportunity to sell your share, on the stock market as it is traded in this manner. This is an especially good option if you don’t have much prior experience in investing as well.
When choosing an ETF, there are a few factors to take into consideration. For instance, you should compare the various fees offered to you by each ETF. This will make it more likely that you can find one that falls within your budget. Furthermore, you should stick with an ETF that focuses largely on the Australian market and local companies. Trading with international companies could end up raising the taxes or fees that may have to pay.
2. High Yield Savings Accounts
If you want a rather passive way to make an investment, you may want to think of opening a high yield savings account for yourself. Here, your money will appreciate, depending on the interest rate attached to the account. Now, despite being termed as high yield, you should know that these accounts often don’t generate a lot of profits. This is largely because the interest rates tend to be rather low. Nonetheless, if you were able to find a bank that offers you a more competitive interest rate, then you may find yourself with a good opportunity. Also, if interest rates do increase, you stand to benefit from this movement.
As you can imagine, the best thing about this form of investment is that you can’t actually lose any money. So, if you are someone who can’t afford to lose any of your investments, this is certainly a good option for you. It is also a rather liquid investment – if you do need money at any point, you can simply withdraw it from this savings account.
3. Term Deposits
Term deposits do bear some resemblance to high yield savings accounts. To start with, this too tends to be a rather inert form of investment. You simply keep your money in an account and it begins to appreciate, based on the interest rate quoted to you by a specific financial institution. Depending on the account that you sign up for, there will be a certain maturation date attached to it. As with the savings account, you can be quite certain that your money will be safe as the Australian government guarantees deposits up to $250,000.
Nevertheless, before opening up a term deposit, you need to understand that once your money has been placed with this form account, you can’t take it out. If you do attempt to withdraw your money before the maturation date, you will find that there is a significant penalty in place. Also, term deposit accounts are affected by increasing interest rates as they have fixed rates. So, if there is an increase, there is no advantage for you.
4. Dividend Paying Stock and DRIPs
Believe it or not, you can actually take part in the Australian stock market, even if you aren’t earning too much money. Of course, in order to be successful at such a venture, you do need to be able to choose the right stock. In such a situation, you will find that dividend paying stock is often the best. Here, you will earn a profit on the shares that you have invested in. As a result, you can expect to get paid at least once or twice a year. This can act as a second income for you.
Another thing that you should consider is Dividend Reinvestment Plans or DRIPs. Here, the company will allow you to automatically invest any dividends that you receive back into the company. So, you will essentially be buying more stock in that particular organisation – due to being a member of such a plan, you can often get the shares at a discounted rate. The reason that this opportunity works well for someone earning a low income is because it lets you turn a small investment into a bigger one.
Most people automatically think of real estate when they think of investment. Of course, if you have a low income, then buying investment property can seem out of your reach. This doesn’t mean, though, that you can’t invest in property. Rather, you can join a Real Estate Investment Trust – these are known as A-REITs in Australia. This opportunity, too, relies on multiple contributions from various investors. This money is used to buy larger properties and you get to benefit from the profits from these investments.
You will find that there are some brokers that will allow you to invest just $500 in an A-REIT. So, as you can imagine, this can prove to be quite a good investment for you. To ensure a favourable outcome, nonetheless, you should be careful to vet every trust that you may consider joining.
How Much Do You Need to Invest?
The next question you will undoubtedly have as an Australian investor is “what is the minimum amount that I can invest?” There are some people who will argue that you can invest as little as $5 or $50, so you can look out for such opportunities. The downside of these investments, however, is that they will not generate much profit and will ultimately prove to be rather futile.
If you want to actually turn your investment into a success, then you need to start with at least $500. This will help you enter the market at a decent position and make a profit that will actually make a difference to you. This is the amount that you should aim for, if possible.
Now, in the previous section, the concept of reducing your expenses was discussed. If this is something you can do, try to ensure that you free up around 10 percent of your income on a monthly basis. Although this may sound like a rather significant portion of your salary, this amount allows you to reap more short-term and long-term rewards.
How to Know If an Investment is Right for a Low Income Earner
Even within the categories discussed above, there can be quite a bit of variation. This means that not all investment opportunities may be suitable for someone earning a lower income. Here are all of the markers to be aware of when analysing a possible venture:
Consider the Risk Involved
With many kinds of investment, there is always a certain level of risk involved. As such, you can stand to lose a small or large portion of the money that you initially invested in a venture. Of course, as a low income earner, you aren’t able to withstand risk as well as some of the wealthier investors. This is why you should always understand the rate or risk and determine if this is something that you can deal with.
For example, if you need access to the full amount of your investment money in the near future, this means that you are averse to risk. So, it is best to stick with options like savings accounts and term deposits. On the other hand, if you can do without that money, then stocks, A-REITs, and ETFs are great choices for you.
Analyse the Fees
As mentioned, most forms of investment have certain fees attached to them. If unchecked, these can quickly outnumber the amount you have saved up to invest. Therefore, you will not actually end up making much of a profit. This is why you should understand just how much any venture or trade will entail. This includes initial fees, management charges, taxes, and anything else that is included. This is the best way to avoid losing more money than you make.
Short-Term vs. Long-Term Profits
When you first start investing, you will need to choose between short-term and long-term investments. Examples of short-term options are term deposits while stocks can be considered a long-term investment. When deciding which one to choose, you should think about how soon you would like to see profits. If you will need to access your money soon, then short-term investments make sense. However, if you have the means and patience to play the long game, then long-term investments are great. Of course, if it is possible, you should try to have a balance between the two. This way, you can maximise on potential profits.
This is all you need to know regarding investments for low-income earners. As you can see, your salary doesn’t have to be a barrier to your future prosperity. As long as you invest your money wisely, you stand to gain quite a bit.