Prioritizing investing on a limited income

July 18, 2023
father and son sit at the kitchen table

Money management on a limited income is a tricky tightrope walk most days. So how do you prioritize investing — especially if you’re already living paycheck to paycheck? Investing for retirement is important, despite income limitations, so let’s break down ways to invest while your cash reserves are low.

The power of compound interest

Eventually, everyone needs to retire from the working world. You might have a goal to retire at a certain age or have plans to work as long as you’re physically and mentally able. Either way is great, but saving will be key. The fact is, Social Security likely won’t provide you with enough income to survive on alone, so you’ll need to supplement with savings you’ve built up over the years.

The best way to save up is to start small and save a little bit each month. If you start early, you can benefit from compounding interest. The power of compound interest cannot be overstated. If you put money in a retirement savings account and it earns interest, that interest is automatically reinvested for you and it earns interest, and so on and so forth.

Check these figures out: If you contribute a modest $20 a month to a retirement account for 30 years, you’ll have contributed $7,200 total. With compound annual interest at a very conservative 5%, however, the total amount in your account would be almost $16,000! You would more than double your savings by simply allowing the law of compound interest to do its thing. If the interest rate is 10%, the amount you’d have is upwards of $45,000!

Easy way to save

If your employer has a retirement plan, use it. This is the easiest way to automate savings and get the most bang for your buck. For one, if they offer a 401(k), anything you contribute will be taken out of your paycheck before taxes. That lowers your taxable income, saving you money at tax time (hello, tax refund!), and it can be a hands-off approach to saving.

Most employers offer some kind of match too. For example, if you work for XYZ Corporation, and they offer a 50% match on anything you contribute up to 6% of your salary, that’s like giving yourself a little raise to use for retirement!

Let’s quickly look at some more figures. Let’s say you make $30,000 and your company offers that same match mentioned above. If you’re able to meet their match by contributing 6%, that’s about $150 a month total that you’d be contributing. Over the course of a year, it’s $1,800 you’ll be able to save for retirement. Not only that, but XYZ Corporation will throw in an additional $900 toward your retirement.

Now, we’re going to fire up our compound interest calculator for you. Over 30 years, you and your employer will have contributed $81,000 total to the account ($54,000 from you and $27,000 from your employer). With that same conservative 5% interest rate on those funds, your account will have about $179,000 in it, and you’ll have only contributed a total of $54,000 to that amount!

If you can’t afford to contribute the entire amount of what your employer matches, do what you can. A little bit a month, as we proved earlier, is better than nothing! Another option is to set up annual automated increases. Chances are you won’t even notice the increase.

Other options

If your employer doesn’t offer a retirement plan, you can always start your own. Talk to your bank about options for retirement savings accounts, and open one. You can even set up automated contributions and eliminate the risk of forgetting.

Exchange-traded funds (ETFs) are another a great way to invest. Since they’re passively managed, they’re lower cost to the investor than mutual funds that are more actively managed. ETFs also allow you to get into assets spread across hundreds of companies, and it’s an inexpensive way to diversify smaller portfolios.

UBT’s Online Investing platform can assist you with automation into a diversified ETF portfolio. You can set up recurring weekly or monthly contributions, and your money gets invested into portfolios created by a local investment management team.

Don’t forget the power of creating a budget and eliminating expenditures that don’t make sense to your financial situation. If giving up a daily coffee habit means you have more to put into savings, consider cutting out that expenditure. Future you will be thankful you did!

Our team is here for you

UBT’s Online Investing tool is a great way to save, and it’s backed by people who truly care. If you have questions about Online Investing, check out our Frequently Asked Questions or our Online Investing page.

  • Online Investing

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