Finances

Investing When You Are Broke In 2020

One of the worst situations one can be in, is being broke. There is a strange vulnerability that comes with being broke, when you don’t have enough money to live independently. The feeling is uncomfortable and living with financial constraints can be one of the most taxing things ever but many people end up in this unfortunate situation and likewise many people end up bringing themselves out of this situation through perseverance, hard work and smart investing.

So let us look at some investing tips to follow when you are broke.

401(K)

If you are employed then you may have a 401(K) account that matches your contributions. 401(K) accounts should always be the first priority for investment whether you are broke or not. However, the money invested cannot typically be used before retirement which is why people prefer other investment options as well.

Dividend Reinvestment Plan

When you are broke, you are not likely to have savings stacked up to be invested. This is where many people end up getting discouraged when they are broke because the savings they have are not enough to be invested.

This however, is not entirely true because there are some investment options that allow you to invest small sums of money over time.

DRIPS or Dividend reinvestment plans (DRIPS) allow you to invest small amounts of money into a dividend-paying stock, by purchasing directly from the company. Many listed companies allow investors to purchase DRIP stocks by making regular purchases of small amounts of stock and reinvesting the dividends so that your investment builds up over time.

DRIPS work like normal stocks, the only difference is that you can invest very small sum of money to start off and then regularly invest a small amount and/or reinvest your dividend back into the stocks and this will overtime increase your investment and you will end up having more than you initially invested. This is an ideal way to start investing if one is broke, as the upfront investment requirement small.

Exchange Traded Funds

Exchange traded funds are investment funds, traded in a manner similar to stocks. An ETF holds assets such as stocks, bonds and commodities like gold. Investors buy shares of ETFs in a manner similar to the shares of any company on the stock exchange. The difference between ETF and shares of a company is that while shares of any company earn dividend on the performance of the company and go through capital gain or loss based on the share value of the company, the shares of ETFs drive their value through the underlying assets and the dividend or profit comes from the performance of the underlying profit.

For example if the ETF is tracking gold as a commodity then the profit generated will be a result of appreciation in the value of gold. Shares in ETFs can be bought and sold during trading hours and they usually attract lower tax and have a lower cost compared to shares, thus making them ideal form of investment if you do not have much to invest.

Try Saving and Investment Apps

You can try investment and savings apps like Acorns. The way they work is really simple. Every time you spend money, it automatically rounds up the change and invests it. So if you spend $3.5 to purchase something, the app will round it up and invest $0.5 for you. In this manner your investment savings will build up over time.

Investing While in Debt

If you have read it this far, you must be thinking that if one is broke, it is not exactly easy to save up money to invest. Specially if you are under debt. Being under debt robs one of savings that can be invested. Having a sizable amount of debt means that any saving that accumulates, will probably be used to pay off the debt first. If you are in such a situation then the best strategy would be to first separate out different types of debt you have.

If you have a credit card debt, then it will have a high interest on it. This debt needs to be paid off first because the longer it stays, the more savings it will eat away. Any debt that carries over 10% of interest charge, should be dealt in a similar manner.

Credit card debt is typically considered a high interest debt, whereas Auto finance or loans in general are low interest debt. They also carry a long term repayment plan that can be from 12 months to 3 years or more and this gives you some leverage to plan your investments.

Tax deductible debt such as mortgages and student loans are also counted as low interest debt because firstly they carry a low rate of interest and secondly the interest payments on these loans are tax deductible, they also have a long payback period which means that you can plan your investments while repaying such loans.

While it is difficult to invest when you have got credit card debt, it is not so difficult to do so with low interest loans. In order to invest your money you need to make sure that the return you get on your investment is higher than the interest you are paying. For example if your car loan carried a 6% interest then you would ideally want to have a return on your investment over 6%. There are some investment options that offer high returns but bear in mind that when it comes to investment there is a risk reward trade off and this means that the higher the return is, the higher the risk attached to it will be. Nevertheless, high return options exist in the market but it requires time to search for the right option that suits your investment needs.

Another thing to be mindful about is the way compounding works. You should ideally give time to your investments to compound and grow exponentially. Even if you save and invest small amounts each month, give them time to mature. Do not be discouraged if you have only got a little to invest, it does not matter how much you invest. What really matters is how long you invest it for and your persistence in doing so.

Being broke, is a bad situation to be in but one which can be changed into a better one. Another option is to seek assistance from a financial planner like Jason Vanclef who can guide you through a personalized plan.   It requires patience, hard work and strategic planning to create a stable active income stream along with passive income streams to make sure that you never get to see such a situation again.

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