How To Start Investing When You’re Living Paycheck to Paycheck

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If you are living to paycheck, investing may not even occupy the smallest amount of your mental real estate. But investing is critical, even if you are struggling to get by. There are two big reasons for that: inflation and compound interest.

First, inflation averaged 3.8% per year between 1960 and 2021. In January 2021, $100 had the same purchasing power as just $11.20 in January 1960. Put another way, you would have needed almost nine times as much money to buy the same thing in 2021 as in 1960. Hence, if your money isn’t growing, you are essentially losing money over time.

This gets to the importance of compound interest. If you had invested your $11.20 in 1960 and earned a modest 6% interest rate, it would have been worth $391.63 in 2021. In other words, it would have been worth several times more than its inflation-adjusted equivalent in 2021. Instead of losing money, you make money with compounding.

These examples show the need to invest, even if you’re living paycheck to paycheck. Here’s how to get started.

Invest Through Your Employer

One of the easiest ways to start investing is with an employer-sponsored retirement plan like a 401(k) or a 403(b). You often can invest via payroll deduction, so the money comes directly from your paycheck. No extra effort is necessary. Of course, if you are living paycheck to paycheck, you might think investing through work is impossible.

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But it’s easier than you may realize, especially if you invest in a tax-deferred account. You don’t pay tax on money invested in these accounts today, so each dollar in them reduces your taxable income. That could decrease your marginal tax rate, lowering your tax bill. Thus, your money could be worth more going into a tax-deferred retirement vehicle than if you spent the equivalent amount.

Buy Fractional Shares

Historically, one of the challenges for stock market investors has been high share prices. Today, stocks such as AutoZone, Booking Holdings and the A-class shares of Berkshire Hathaway have four-figure price tags. It’s easy to see why this would be a problem if you could invest only in these companies by purchasing whole shares.

Thankfully, many online brokerages are allowing fractional share purchases today. This lets you purchase small pieces of stock, so you can typically invest as much or as little as you want. Even $1 is enough to start investing in the stocks mentioned above. Popular financial firms such as Vanguard and Fidelity are among those that now support fractional share purchases of stock.

Buy Mutual Funds and ETFs

Buying a mutual fund or exchange-traded fund (ETF) takes the convenience of fractional shares one step further. In some cases, these funds often invest your money in hundreds or even thousands of companies every time you buy shares. For instance, total stock market index funds invest in nearly every publicly traded company. They often support fractional share purchases, too. Even if you don’t have much to invest, you can still invest $15 or $25 per month and let it grow with the market.

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Avoid Fees When Possible

Avoiding fees is a smart move for any investor. But when living paycheck to paycheck, it’s even more sensible to minimize the total amount you pay in fees.

Here’s a simple example that shows the impact of fees for someone investing $50 per month:

Suppose you start with $0, investing $50 per month ($600 per year) and earn a 6% return. You do this every month for 30 years. At the end of 30 years, if you invest with a 1% fee, you would have $41,856.47.

However, you would have paid $8,424.54 in fees. All else being equal, if you reduce the fee to 0.04%, you would have $49,909.56. In this second example, you pay just $371.45 in fees over 30 years. That’s about $1 per month.

Adopt a Zero-Based Budget

If you are living paycheck to paycheck, you may not have anything left to invest at the end of the month. While increasing your income would help, that takes time. For now, you can try using a zero-based budget. The name suggests you would spend every dollar, but that isn’t necessarily the case.

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Rather, you give every dollar a specific purpose. One of those purposes could be saving and/or investing. If you live paycheck to paycheck, you may not have much left for savings goals. But adopting a zero-based budget means putting every dollar under a microscope. If you can identify one or two things you can eliminate or where you can make cuts, you might be able to scrape together $50 for investing.

Bottom Line

Investing can seem difficult or impossible when you live paycheck to paycheck. But investing through your employer and buying fractional shares are among the methods to make it a reality. You also can use a zero-based budget to find a few dollars here and there to invest. Remember that every bit helps. The sooner you start investing, the better — even if it’s just a few dollars per month.

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About the Author

Bob Haegele is a personal finance writer who specializes in topics such as investing, banking and credit cards. He left his day job in 2019 to pursue his passion for helping people get out of debt and build wealth. You can find his work at outlets such as Business Insider, Forbes Advisor and SoFi.
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