Your low income can longer be the reason for financial strains. To know how to build a solid financial base even with a low income, check out this article!
Investing has its foundation in the famous saying- ‘It takes money to make money’.
While saving money is the first step of your financial planning, investing it is what will ultimately help your money sustain the turmoils of rainy days.
We all require financial security but it all eventually boils down to your income levels and your willingness to actively seek savings and investment plans. If you live paycheck-to-paycheck, there would hardly be anything left to put towards investments.
Some people struggle with a lack of financial planning despite a good income level, others’ don’t find their income sufficient enough to bring in any major changes in their financial health!
Well, both situations are difficult to deal with. However, in the former case, good guidance can successfully elevate the financial lifestyle, whereas, the latter case requires more extensive steps and practices.
If you are currently struggling with a low income and aspire to actively save and invest to transform your financial situation, make sure to begin with analyzing your budget. The next steps are listed below.
Tips to Save Effectively Despite a Low-Income Level
1. Be Consistent With Your Savings
A good saving level can thrive only if you are consistent in your saving efforts. Setting aside too much money, too low money, a once-in-a-while saving strategy, etc. all will fail to help your savings.
If you find yourself unable to take charge of your money, turn to automating your savings plan. There are plenty of online tools and apps available for the same.
With your low income, you should keep aside a targeted sum of money every month. You can begin with transferring 10% of your monthly income in your savings account. Gradually as you will start investing, you can raise this level a little.
Also, you must try to look for alternative sources of income in order to supplement your future investment plans. If you have some inheritance like a shop or a house, etc., you can start planning to collect from there if possible.
In case you think that your inherited property isn’t at a very profitable location, you can try to sell that and purchase elsewhere. This additional income from rent can definitely help you divert at least a slightly larger share of monthly income toward savings.
2. Stick to Your Money-Efficient Budget Plan
A money-efficient budget that can help you to stretch every penny to its optimum use is required if you have a low income. If you think budget is like limiting your wishes, it is not so. By stressing about stretching your last penny we mean having control over your expenditure habits.
In order to sufficiently bridge the gap between your saving goals and actual savings, you need budgeting. Where you spend a major section of your income and where it is possible to avoid it- both form the base of how you will plan out your savings, and later your investment plan.
3. Insurance and Emergency Funds: The Basic Needs
We can’t stress enough how important it is to maintain a cushion for your finances. From your car, health, life and travel to your property, education and wedding- all require some form of personal allocation of funds to prevent burden on your regular expenditures.
It makes no sense to avoid insurance, especially full-fledged health insurance, just because you feel healthy right now. Life is unpredictable and you may need it for your family if not for yourself.
Also, since third-party insurance is compulsory in India, many people avoid insuring their own car and even if they do so, the insurance doesn’t cover much of the expenses and is generally selected based on the lowest premiums.
Even if your income is less, you must devote some part of it to at least these 3 basic emergency plans: life insurance, health insurance and a special fund for emergencies (you may consider easy liquid assets here like gold, etc.).
If possible, you can think of opting for a term insurance plan. But if you are uncomfortable about not getting the proper benefit of it, simple life insurance may be enough till you save and invest enough.
4. Say Goodbye to Unnecessary Expenditures
No doubt that if you have a low income, there should be no space for negligence in spending. Do not drain your own money and rather start to look for alternative ways to make money.
If that is not possible, at least try to cut down on your expenses and save enough so that you can start investing soon.
To start, you may want to create separate budgets for your regular expenses. You can save a lot of money just by being a little picky about where you spend. Choose between your TV or OTT subscription, either go to the Gym or start working out at home, eat healthy home-cooked food rather than eating out regularly, opt for public transport instead of your personal vehicle, spend on books and travel rather than on fancy impulse purchases, etc.
There are plenty of options to either divert your spending to a cheaper alternative or cut them altogether. Depending on what you consider to be necessary, you can adjust your lifestyle accordingly.
Now that you have built a savings habit, it's time to bring in the concept of investment.
Tips to invest effectively with low income
5. Dividend Reinvestment Plans (DRIPs)
Through DRIPs, you can invest small amounts of money into dividend-paying stocks. You can buy them directly from the company and use small sums to build a portfolio.
In simple words, Dividend Reinvestment Plans allow you, as a shareholder, to automatically reinvest your cash dividends into additional company shares.
Typically, the companies set a limit on the number of shares that can be purchased under a single transaction.
DRIPs use a rupee-cost averaging system through which you can average out the purchasing price of a stock while buying them since their value usually fluctuates. The benefit under DRIPs is that you can amass more shares without any brokerage or fee!
6. Exchange Traded Funds (ETFs)
ETFs are nothing but simply some financial products that track the performance of specific sectors of the investment market. Through ETFs, you can invest small sums in stocks, commodities, bonds, foreign markets, etc.
As someone with a low income, you can start with buying as little as one share of an ETF. If you want, you can do so through a broker too.
Some ETFs even pay you dividends and hence makes it easy for low earners to expand their portfolio.
7. Target Date Funds
As the name suggests, Target Date Funds are an easy way to your financial goals. As an investor, you get to pick the specific fund to invest in depending on how much money you think you will need to withdraw next year.
A benefit of this investment scheme? It follows a Guild Path! That is, as you start investing, over time, it moves your money from riskier to safer investments and ensures stable returns while also keeping your portfolio safe and diversified.
As a low income earner, if you are worried about your retirement plans, you can use this investment scheme and target your retirement date. With a proper blend and timely changing percentages of stocks and bonds, you can keep your money safe as retirement approaches.
In some cases, a minimum initial investment may be compulsory but this plan is definitely worth it especially if you do not want to manage your portfolio on your own.
The only thing to take caution with is to carefully choose the type of Target Date Fund you need. Some of them charge a very high fee and may not sit right with your risk appetite.
8. 401(k) Retirement Plans
A 401(k) retirement plan is nothing but an employer sponsored savings plan. Through this, you can set aside some amount directly from your paycheck into an investment account.
In India, 401(k) plans are a type of ‘qualified’ retirement plan. That is, the IRS (Indian Revenue Services) provides certain tax benefits like exemption from paying taxes on the returns from your initial investment. You will have to pay tax just once after you retire and finally take out the money.
Things to note are: In India, you are allowed to withdraw from 401(k) only after you turn 59.5 years old. In case you withdraw before that, there will be a 10% penalty alongside regular income taxes.
The contributions made under 401(k) plan and the investment earned are subject to taxes as ordinary income during the time of withdrawal.
Therefore, in case your employer provides you with a 401(k) plan, you might consider it as a secured retirement plan.
Saving and investing with low income can be a herculean task. However, if you follow the right strategy and try to keep a good control on your spending instincts, you can definitely create your own secured portfolio and get rid of the mental financial strain.
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