Many people pursuing financial independence have a big salary. Not me. I grew up in a middle-income family that got financially worse when the 2008 global financial crisis hit. A house we couldn’t afford, both my parents weren’t working anymore (involuntarily), and I was studying.
My parents developed an aversion towards the stock market and acted like it was a hot pan. If you would touch it, you would burn yourself. Due to that, I grew up thinking that investing in the stock market was difficult and only for really smart people. No for me.
There are two things that changed my mind: Rich Dad Poor Dad and The Index Card. Rich Dad Poor Dad by Robert Kiyosaki does a great job explaining what is the difference between assets and liabilities and how to make money work for you. I’ve learned many lessons from Rich Dad Poor Dad that I’m still applying today. The Index Card by Helaine Olen makes the important point that personal finance and investing doesn’t need to be scary or complicated. She explains finance in a way that would fit on one index card, which is a gift in and of itself. Because of her book, I was thinking: ‘Maybe, just maybe, I can handle this whole stock market thing’.
On top of that, I’ve read many blogs from people my age who manage to invest without having a huge amount of money or a huge amount of stock market knowledge. That made me more confident that I would be able to do it too.
When I started with investing, I was making $26,000 per year (before tax, for the record) and had $19,000 in student loans. I’m not paying off the student loans this year, but next year that will be deducted from my salary automatically. It took some time for me to have a considerable investment portfolio, that’s okay. With the first dollar you invest you learn your first lessons.
It’s been almost two years since taking that 26K job. I’ve learned so much from investing, which is making me slightly wealthier and much more knowledgable than two years ago. Investing doesn’t need to be complicated – at all. Here are the steps I took to simplify investing, which resulted in me becoming a serious investor on a $26,000 salary.
How I Became A Serious Investor On A Low Salary
1. I Opened A Brokerage Account
The word brokerage account was what took me so long to start investing, it sounds too I-need-to-know-what-I’m-doing. I decided to just start and figure it out as I go. That’s basically my life’s motto. I found that the step of investing your first dollar is the hardest, after that it will become easier.
I started investing with DEGIRO, which is a low-cost European broker. I started investing with my tax refund of the financial year 2017 and haven’t looked back since.
2. I Invest A Fixed Amount Per Month
Since I’ve started to invest, I tried to buy some indexfunds every month. Not that I consistently did, until I decided to pay myself first. When I receive my paycheck, the first thing I do is buy new stocks.
I will buy a fixed amount of stocks for the month, meaning that I always keep buying. If I have something left from my monthly spending, I will add that to my next months’ stock addition.
Investing monthly and investing a fixed amount of money every month, makes sure that my portfolio is adding money to it every month. No matter what the stock market does, I’ll always keep buying. When I buy stocks for a fixed amount of money every month, I will buy more when the stock market is low and I will buy less when the stock market is high. That means that over time, my buying price is averaging out.
Besides it’s important to invest a fixed amount per month, it’s also important to save money every month. At the beginning of your financial journey, your savings rate is more important than your rate of return. It’s important to invest as much as you can towards your investment and get the compounding machine rolling.
3. I Invest Mostly In Low-Cost Exchange-Traded Funds (ETFs)
Me two years ago would not know what I just said, so let me simplify it for you! There are board-market ETFs that track entire markets or indexes like the S&P 500. By combining several ETFs, or by buying an ETF that covers the world economy, you can create a diversified portfolio – meaning that when one sector doesn’t perform as well this is compensated by other sectors.
What is so attractive about ETFs, is that they are really cheap to buy and hold. As I mentioned, many brokers offer free trading of certain ETFs once per month or so. Besides that, I tend to focus on ETFs that have a low expense ratio – meaning that the yearly costs of running the fund are low. I would recommend you check out Vanguards ETFs, that have an average ETF expense rato of 0.07% (it costs $0.70 to manage $1000 investment dollars) compared to a 0.27% industry average.
I’m a big fan of low-cost ETFs because they have low fees! If you’re investing year over year, the lower the fees you pay, the more money you will keep in your portfolio. If you’re starting with investing and you want to become a serious investor, I highly recommend low-cost ETFs.
4. I Decided To Diversify My Portfolio
When I first started investing, I was very tempted to buy the ‘blue-chip stock’. A blue-chip stock is a stock that is generally considered as profitable and ‘too big to fail’ – like Apple or Starbucks. The point is, there is no magic stock. If there would be, anyone would buy it and make a fortune off it – there would be no one left to manage your investments because they’ve all quit their job and are sipping coconuts on the beach!
This isn’t to say that there is no way you will make money when investing in blue-chip stock, it’s just to say that it’s hard do diversify your portfolio when you don’t have massive amounts of money to start out with. When you’re not diversifying properly and putting too many eggs in one basket, you’re taking a risk. If these stocks lose, you risk losing more than when you would have diversified among companies/countries/sectors.
5. I Get Really Lazy About My Investments
There is a statistic that is repeated many times, saving that investors with the best-performing portfolios are dead. There was another fun study from Fidelity, where they found that the investors with second-best performance, forgot they had an account.
Point taken. I noted for myself: if I want to become a serious investor, I will get lazy about my investments. When you let your portfolio do the work for you, you will generally make money over a long period of time.
I love this, because I mostly take the set-it-and-forget-it approach. Meaning that I buy the stock and I see that money as not available to me – ‘okay, that was my money, I’ll see you again when I retire’. I will only invest want I’m not spending and what I don’t need for the short term – meaning I have about 3-6 months of living expenses in an emergency fund.
When I just started investing, I checked my broker account all the time. I’m sure more people do that. I cheered when it was up, felt sad when it was down. It was exhausting. I am now checking my investments once every few weeks, to add money to my portfolio.
If you don’t check your portfolio too much, you will notice that the dips even out. The day to day fluctuations in your portfolio are not important.
6. Go Against The Herd
Most people will go with the herd. When the market goes up all they do is buy high, and when the market goes down they sell low and never want to invest in this scary stock market again. If you’ve seen people lose their money in the stock market, get over your fear of investing and start today! Investing is simple, not easy. If you can stick to your buy and hold strategy, no matter what the market goes through, you’re good.
Personally, I love market drops. If there is any big market drop, I will buy more. For example, in December 2018 I was following one of the tips I learned from Warren Buffett who said that you should go against the herd. ‘Be fearful when others are greedy, and greedy when others are fearful’. I bought more than double the amount of stock I would normally buy, which grew to a nice profit over time.
That’s not to say that I will not start getting a little nervous when the markets will go down several months in a row, but I will stick to my guns and my investment strategy. When everyone is selling, you can buy the stocks for a nice discount!
7. Adjust When You Get Smarter
When you’re investing in the stock market, it might seem that you have a lot to learn. One thing to really become a serious investor on a relatively small salary is by continuously learning and growing.
I was starting with investing in individual stocks and found out that I was paying a high maintenance fee for those stocks. It wasn’t high in absolute terms, but relative for the amount that I invested in those stocks it was. When I found out about my high fees, I read about it online. I learned and I grew from it. Along the way I got smarter and put that knowledge into practice.
I learned how to invest in the low-cost index funds, where I could cut most of the fees altogether. I rebalanced my portfolio and was happy with my allocation after that.
What was really important for me is learning to invest in a way that I was comfortable within the long term. For me, that is not trying to beat the market or focusing on individual stocks. I like things simple and easy.
8. Focusing On Passive Income
Let’s continue the path of easy and simple, and starting to shift our focus more to passive income. It’s an amazing tool to use, in many ways. It’s great to start focusing more on the psychological aspect of it, boosting your motivation and confidence every time you receive dividends. That’s why I love dividends, they provide a continuous stream of passive income that you can reinvest.
The low-cost index fund that I invest in pays dividends quarterly. It’s not a huge percentage of dividends that they pay, but the act of receiving some money from your investments every quarter is amazing.
Besides dividend income, I love to focus on Peer-to-Peer lending over the last six months. This is a great way to earn more money, by lending it out to others. I have amazing platforms where I get payments regularly to my accounts. If you start with Peer-to-Peer lending, just take it easy and feel which platform feels good and intuitive for you. It’s important that you invest in a platform you feel comfortable with.
For July, I’ve earned 80 euros with my different passive income sources, yay!
My favorite European Peer-to-Peer platforms are:
- Mintos, 10-12% return – read our Mintos review here
- EstateGuru, 10-12% return – read the EstateGuru review here
- Reinvest24, 8-11% average return – read the Reinvest24 review here
In general, I think having basic investing knowledge can bring you a long way. It’s starting the compounding machine, meaning that you will earn money over money, which is an incredibly powerful tool. Also, it’s knowing that you have everything inside you to make every financial decision for yourself. It’s working towards early retirement and knowing that you will get there, no matter how impatient you will get.
Do you think you can start investing with little money? When did you start investing?