Don’t have a lot of money to invest but want to get started investing? Here are two simple investment strategies for beginners or those on a budget to make a great first step towards improving your finances long-term.
A Roth IRA or SEP-IRA are both great ways to start investing in your financial future. Money invested in a Roth or SEP IRA can grow completely tax-free. Within certain guidelines, and in a pinch, you can access your direct contributions with no penalties or taxes. If you make a decent annual contribution, either one of these IRAs can make you a millionaire over time.
A SEP (self-employed persons) IRA is perfect for those in the gig economy or small business owners and it’s only available to those who work for themselves.
Strengths of a Roth IRA: $6000 per year or $7000 if 50+. Taxes are paid now to avoid being taxed on your distributions later.
Cons of a Roth IRA: Annual contribution limit. Higher earners can’t find one directly and have to put money into a traditional IRA and convert it to a Roth afterward.
Strengths of a SEP IRA: Can contribute up to 25% of your compensation or $58,000 max.
Cons of a SEP IRA: If you have employees, you must contribute the same percentage of your employees’ income to their SEP IRAs as you do to your own.
Investing in an index fund can be safer than placing your bets on individual stocks and trying to pick a winner.
Invest your Roth IRA or SEP-IRA in a mutual fund. One of the best is Invesco S&P 500 Equal Weight ETF (NYSEMKT: RSP), according to The Motley Fool. They say: “index-based investing has consistently trounced the performance of most actively managed funds.”
The Invesco S&P 500 Equal Weight ETF only charges a 0.2% annual fee and almost no turnover.
Next, set the dividends from this to reinvest. The reinvestment of your dividends from this mutual fund can build significantly over the long term as the returns over time.
The point here is to get started in investment when you don’t have a huge chunk of cash. While the initial $5000 will get you started, it’s unlikely to be enough to set you up with a comfortable retirement. Instead, it is a jump start. Follow that move by continuing to put more money on top of that initial $5000 investment. The more you can add, the greater the amount of interest you can earn and build up your future nest egg.