How to Start Investing When You Don’t Have a Lot of Cash

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For too long, we’ve been taught that investing is a privilege reserved for rich people.

But you shouldn’t wait until you’re rich to invest. In fact, the right time to start investing is before you’re rich.

You might say, “but I don’t have any disposable income.”

Here’s the thing: If you invest smart, money you invest isn’t disposable. You’re putting that cash to work to make you more dollars in the long term. The sooner you start, the better.

Here’s why.

Why You Should Start Investing as Early as Possible

Investing is all about time. The longer you stay in the game, the more likely you are to enjoy the returns the stock market is expected to produce (around 7% a year, adjusting for inflation).

The earlier you invest, the more returns you can potentially earn. You can then invest those returns, which can earn further returns. That’s the magic of compound returns.

In fact, if you start investing when you’re 22 as opposed to 32, you could earn more while investing less money because you started investing younger. Think of it as a reward for being fiscally responsible.

OK, so you’re sold. You want to start investing — but where do you begin?

Know Your Investments

While it’s great to be educated about the stock market, I don’t actually mean you have to know the ins and outs of every single stock, bond and commodity being traded. Rather, know how you should be investing.

Think about your objectives: to maximize your money and save yourself time. The best way to do this is through passive investing, a type of investing that’s both simple and cost-efficient.

Forget the flashing computer screens and yelling traders. Instead of trying to predict the stock market and buy or sell stocks of individual companies every day, in passive investing, you buy index funds and hold them for a long time. It’s not as exciting as a trip to the casino, and that’s exactly why it’s been proven reliable over time.

While there are different kinds of index funds, ETFs are some of my favorites because of their extremely low cost and tax benefits. There are thousands of index funds to choose from, so check out free online resources to educate yourself. Some websites I like are Money Under 30, The College Investor and Bogleheads.

Then, if you want help putting together a portfolio that’s right for you, try an online, automated financial advisor. Online automated financial advisors are a low-cost (or no-cost) option that can be great for for newer investors, since traditional financial advisors typically have high fees and account minimums which may not always work in your best interest.

Again, remember your goals: You want to grow your money, not spend it paying other people.

Pay Yourself Instead of Cutting Back

I often hear people who are new to investing say they simply don’t have any money to invest. The common advice here is to say “cut one thing out — your morning latte, or your gym membership!”

While it’s great to be financially fit, the problem with this line of thinking is that you’re now associating investing with deprivation, which is a) no fun and b) probably not a sustainable way to save money.

That’s why I recommend “paying yourself” instead. Every time you accomplish something unrelated to your finances, pay yourself for your hard work by putting money in your investments.

So, if you crush it at CrossFit, put $10 into your Roth IRA. If you rocked that presentation in front of your boss, put in another $20.

Speaking of IRAs…

Open up a retirement account. Now.

The word “retirement” leaves a bad taste in some people’s’ mouths. You might picture endless hours of board games and bland food.

But retirement no longer means the stage in your life when you’re too old to work. It means having the financial freedom to do whatever you want. That could mean traveling the world or even starting your own company.

Individual Retirement Accounts (IRAs) are designed to minimize taxes so you can maximize your money. Different types of IRA accounts each have different rules and contribution limits: a traditional IRA, Roth IRA, and a SEP IRA.

To find out which IRA is right for you, click here to read the IRS guidelines. You can open up an IRA account with a brokerage firm, or online automated financial advisor.

Your employer might offer a retirement account like a 401(k) and 403(b), which is great — with a caveat. These accounts do have fees, so make sure the fees don’t outweigh the match your employer provides.

It’s possible to have both a 401(k) and an IRA. If you can contribute enough to both receive an employer match and max out your IRA, that’s great!

However, participating in both a Traditional IRA and a 401(k) may have some tax deduction consequences. Read more about that here and consult with a tax advisor before making any decisions.

Know Your Goals

Having solid goals is crucial.

It’s important not to get too caught up in the daily fluctuation of the stock market, and understanding your big-picture goals will help you be a smarter investor.

Do you want to buy a $200,000 house? Have a rainy day fund of $10,000 in a year and a half?

Think about how much you’ll need to invest to reach those goals within a specified time frame. Some free financial planners will calculate this for you, but if you want a close approximation, play around with this compound interest calculator.

Keep separate accounts for different financial milestones so you can track your progress toward each one. This way, instead of building up to a vague dollar amount, you can actually see how close you are to achieving your concrete goals.

Worried you’ll stagnate when it comes to putting money into your accounts? Set up auto-deposit from your paycheck or checking account so that you don’t have to think about it.

This way, you won’t even feel the money coming out of your account — because you’ll never see it.

Keep Calm and Invest On

Millennials tend to keep their cash as cash instead of investing it because it comes across as “safer.”

You might have some hesitations about investing because you saw people going through financial turmoil in episodes like the crash of 2008. But while I understand it may be tempting to save money without investing it, you could be missing out on an opportunity to make money.

Crashes happen, and if you look at the stock market over the last hundred years, chances are your investments will bounce back in time (if you’re investing passively). Although incidents like The Great Depression don’t happen every day, the stock market will ebb and flow regularly. So don’t be surprised — or worried — when it drops.

History has shown that it’s very, very likely the stock market will eventually bounce back — it always has, even after 2008.

And, because with passive investing you’re trying to grow with the stock market as opposed to beat it, your investments will recover as well.

Note: Passive investing is not day-trading. You’re not making huge buying and selling decisions on a day-to-day (or hour-by-hour) basis.

While there will be daily dips and bumps in the stock market, passive investing isn’t about making daily trades. It’s a long-term strategy, so it’s important to think of your investments over the course of a few years as opposed to an endeavor you track every day.

Don’t hop on day-trading forums, listen to your friends’ freakouts or beat yourself up when your account occasionally slides downward.

The Bottom Line

Investing is your friend. The sooner you start, the more money you have the potential to earn, the closer you are to financial freedom.

What does financial freedom look like to you? That’s an adventure you’ll choose for yourself.

Your Turn: When did you start investing? What was your biggest challenge?

Vicki Zhou is the Co-Founder and Co-CEO of WiseBanyan, the world’s first free financial advisor. An engineer turned entrepreneur, she enjoys helping people get their money on track, cheering for women in finance and tech, and exploring the best nearby culinary delights.