1. Set Clear Goals

Before you start investing, it’s essential to define your financial goals. What are you investing for? Is it a short-term goal like an emergency fund or a long-term goal like retirement? Having clear objectives will help you determine your investment strategy.

When setting your goals, make sure they are SMART (cringe):

Specific: Define exactly what you want to achieve with your investments. In my case, I’d say my investment methods become more managed when I set a specific goal like overseas travel, getting LASIK surgery, or retiring by the age of 65. When I put some general goal like “for later use”, I tend to skip a few months, or invest in assets that aren’t suitable for whatever goal that is.

Measurable: Set tangible criteria to track your progress. If your goal is a house deposit, for example, you must look at the kind of house that you want to buy and the price range. After that, you can tell how much you’ll need in downpayment, say $40,000, and in how many years you’ll need to cash out on it (say, 8 years). Now you’ll know how much you need to invest monthly to achieve that goal.

Achievable: Ensure your goals are realistic given your financial situation. There are many things that we want in life, but your monthly pay might have something else to say. Prioritize and choose the ones that matter most. As your career grows, add more goals and investments into the picture.

Relevant: Make sure your goals align with your overall financial plan. For example, if your salary is $600 after expenses and everything else. Your main objective is to buy a house in 5 years, we’d suggest you put aside other goals that may stop you from getting the money needed for that house.

Time-Bound: Set a timeframe for achieving each goal. This is very important. Even when you say, “It’s for rainy days,” at least set a time frame of how much you want in how many months or years. If not, from my own experience, I’d skip my investment for the month and use that money for something else (food — I eat a lot of things I’d regret by the end of the month).

Here’s what a SMART goal sounds like:

“I want to save $10,000 for a down payment on a house within five years.”

2. Create a Budget

Take a close look at your finances and create a budget. Determine how much money you can allocate for investing without compromising your daily expenses and emergency savings. Remember, it’s crucial to have an emergency fund in place before you start investing.

Start by tracking your income and expenses to understand your cash flow. Identify areas where you can cut unnecessary spending and redirect those funds toward your investment goals. How I’d do it is that from 30% of my income, 60% of that will go into emergency savings and 40% of that will go to investments.

If you make $2,000 a month, 30% of that is $600. From that $600, you can put $360 into emergency savings and $240 into investments. Oh, and do tweak around with that 30%. I know some of us have more commitments than others, there’s no rigid rule on that 30%.

3. Explore Low-Cost Investment Options

When you have limited funds, it’s essential to minimize fees and expenses associated with investing. Here are some low-cost investment options to consider:

a. Exchange-Traded Funds (ETFs)

ETFs are investment funds that trade on stock exchanges, much like individual stocks. They offer diversification and typically have lower expense ratios compared to mutual funds.

b. Fractional Shares

Some brokerage platforms allow you to buy fractional shares of stocks or ETFs, which means you can invest in high-priced assets with limited funds. However, make sure that the investment you make is worth the fees that you pay (if applicable), like, if you buy a stock for $10, but you’re paying $4 in fees, you’d need a 40% increase in stock value just for you to break even (that is if they don’t charge more fees).

4. Choose the Right Brokerage Account

Selecting the right brokerage account is crucial when you’re starting with limited funds. Look for brokerage firms that offer:

a. Low or No Minimum Investments

Many online brokers have no minimum investment requirement, making it accessible for beginners.

b. Commission-Free Trades

Some brokerage platforms offer commission-free trades, which can save you money, especially if you plan to make frequent investments.

c. Educational Resources

Choose a brokerage that provides educational resources, tutorials, and tools to help you make informed investment decisions.

5. Start with a Diversified Portfolio

Diversification is key to managing risk in your investment portfolio. Even with limited funds, you can build a diversified portfolio by investing in a mix of asset classes, such as stocks, bonds, and real estate. ETFs can be a convenient way to achieve diversification with limited funds.

We also provide a tutorial on how to see if your portfolio is well-diversified:

Risk Management: Portfolio Variance

6. Dollar-Cost Averaging (DCA)

Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market conditions. This strategy can help mitigate the impact of market volatility and is particularly suitable for beginners.

Simply, if you can invest $40 each month. Then do it. Regardless of how the market is doing, high or low, just invest that. Even when you buy it at a high price, when you constantly do it this way, you will eventually buy it at a low price as well.

It’s like constantly beating all the holes at a whack-a-mole, you’d hit blanks often, but you’ll also hit all the moles. In the case of the stock market, the stock market has constantly been going up. They’d fall for a while in crisis, but overall, they’re doing way better than decades ago.

7. Reinvest Dividends

If you invest in dividend-paying stocks or funds, consider reinvesting your dividends. This allows your investment to grow faster over time through the power of compounding.

8. Keep an Eye on Fees and Taxes

Pay attention to any fees associated with your investments, as well as the tax implications. Minimizing fees and optimizing your tax strategy can significantly impact your overall returns.

9. Stay Informed and Patient

Investing is a long-term endeavor, and the markets can be unpredictable. Stay informed about your investments and the broader economic landscape but avoid making impulsive decisions based on short-term market fluctuations.

10. Increase Your Contributions Over Time

As your financial situation improves, aim to increase your contributions to your investment portfolio. Gradually increasing your investments can accelerate your wealth-building process.

11. Seek Professional Advice When Needed

If you’re unsure about your investment choices or need personalized advice, consider consulting with a financial advisor. They can provide guidance tailored to your specific financial situation and goals.