Tuesday, March 17, 2009

Investing for People With Low Incomes

In this recession where many people are either unemployed or working part time jobs, it is hard to have thousands of dollars set aside each month for investment.

Some people cannot maintain a a checking account, not to mention a fully funded retirement account, but they can still invest and grow passive income. Even investing small amounts gradually will smooth out big money events.

Investing for People With Low IncomesFor those in a low-income situation, the best places to invest are low risk and easily accessible accounts. If you don't have an emergency fund (ideally 3-6 months expenses), then establishing one is the first step.

When I say emergency fund, I don't mean stashing money under your mattress or a low rate savings account. You should consider Money Market Accounts (MMAs) which offer a higher interest rate than checking or savings while its FDIC insured status gives you a peace of mind. It is also a good source of overdraft protection for checking.

Money market accounts are available in most banks and can be easily set up. You can make unlimited withdrawals and transfers without any penalties. Many MMAs are available with low to no opening requirement. In fact, some banks offer cash incentives for opening an MMA. The devil is in the details though, so read the fine print on the minimum amount and time for your money to be held in that account.

Money market accounts are also a convenient way to invest because you can set up automatic deposits. I recommend the minimum automated deposit as you can invest on a regular basis without over-drafting your regular account. Whenever you have extra money, you can invest that and grow your nest egg.

If you like to tune your investment according to interest rates, you can consider Certificates of Deposit (CDs). In periods of declining interest rates, the rate of return on a MMA will adjust downwards but a CD will hold it's value. You continue to get a fixed rate of return for the duration of the deposit.

Conversely, rising interest rates could leave you stuck with 2-3% less for the money you're investing. I recommend investing in Certificates of Deposit for a period of 6 months to 3 years so that you do not miss out on lucrative returns.

However, if you are very risk averse or an impulsive spender, you can commit to a long term Certificates of Deposit because withdrawing money involves paperwork and penalties. These hurdles should keep your temptations at bay and ensure an intact principal.

Another place to invest is in a Health Savings Account (HSA). If insurance isn't available through your employer, this is one way to keep yourself insured and invest for the future.

Health savings account have a high deductible that must be met before the plan provides any benefits. On the upside, you have a lower monthly premium and money you deposit into the account earns interest.

If you have few medical bills or go to the doctor rarely consider them as a way to both invest and take care of your health. The most important investment you can make is your health. Going without medical care is costly - most bankruptcies are caused by medical bills, not credit debt.

Once you've established an emergency fund and obtained health insurance, look at Roth IRAs as a place to put pre-tax money. These investments earn interest until you retire, at which time you make withdrawals and, presumably, pay less in tax on the money.

Finally, the most important investment advice for people with low incomes is - invest in yourself. Knowledge is priceless. Keep reading articles like this and think critically about the advice that's given. Invest time in developing your skills or acquiring new ones to increase your earning power.


Anonymous said...

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Crude Oil Trader said...

Buy and hold is dead at this point so bonds are about the only option poor people really have.

Great post!

Petunia said...

That's a good article, but you have some incorrect information regarding Roth IRAs. Namely, they aren't pre-tax and you don't pay a cent in tax on your eventual withdrawals. You're describing a traditional IRA. Roths are funded with already-taxed money.