How to Invest on a Fixed Income

Most money experts agree that money should be put into an investment where it will grow. However, what if you do not have extra money to put into an investment?

Having a fixed income does not warrant forgetting about investments that can have a return. There are many ways that you can invest while living on a fixed income.

Pay Yourself First

When you are on a tight budget, the idea of paying yourself first seems a bit unrealistic. This strategy is not unrealistic.

When adjusting your spending patterns, calculate a realistic percentage to save every time the income is received. Start out at paying yourself 10 percent of that monthly income and gradually increase that percentage as your financial situation allows. The best plan of action, though, is to calculate what you think would be most comfortable. Zero percent should not be an option.

Choose the Best Investment

Not all investments are the same, nor are they meant for everyone. Buying a few shares of stock in a foreign company may be a comfortable investment for some people, but may not work as well for you, especially if you know little or nothing about stocks.

Do some research on the various types of investing opportunities available. You can visit the United States Securities and Exchange Commission web site and use their mutual fund calculator (www.sec.gov/investor/tools.shtml) to compare the costs of the different mutual funds available.

Train Yourself to Invest

When you review your budget and spending habits, write out a detailed plan to reference while beginning the good habit of saving.

Beginning to Invest

A simple savings account is usually the best place for beginning investors on a fixed income to start. Although the interest is usually low, a savings account can be the perfect way to train yourself to invest wisely. Every pay period, withhold the percentage that you found comfortable for your situation and put the money into the savings account. The money that you will earn on this will be small, but once you are in the habit of paying yourself first and having money set aside in the event of an emergency, you will be able to begin investing in higher yield investments.

In addition to being a low-risk investment, another benefit of a savings account is that you can withdraw money from it immediately in the event you withhold more than you should have. This initial step will help you determine how much you can comfortably set aside each month for yourself.

Stepping Up Your Investment

Once you are comfortable with your investment plan and have some money built up in a savings account, research other types of investment opportunities available. If you choose to keep your money in the bank, look into certificates of deposit (CDs) and money market accounts that offer higher interest rates than a regular savings account. Talking with one of your bank’s personal bankers would be a step in the right direction for handling investments without any additional charges.

For those who want more of a return on an investment, there are options available for you. More than 1,000 major corporations offer Dividend Reinvestment Plans (DRPs or Drips) or Direct Stock Purchase Plans (DSPs). These are free or low-fee investment opportunities in which you can invest monthly for as little as $20 at a time without having to go through a broker.

An index fund is another investment product that requires a higher initial investment of approximately $250. Once the initial investment is made, you may continue to add any amount as frequently or infrequently as you choose. The average return for this product is approximately 10 percent, which is a sizeable increase from the initial savings account. Individual Retirement Accounts (IRAs) are a popular form of index fund.

A Worthwhile Return

When reviewing the hard numbers, investing is a wise decision. Though you may be on a fixed income today, budgeting for the future can help you gain financial security and independence.

Hypothetically, if you are 40 years away from retirement, you could potentially end up with over $442K for your retirement by age 65. By initially investing $1,000 into a 10 percent yielding Roth IRA and then adding $1,000 to this investment plan every year, you will have $442.592.67

If you do not have 40 years for an investment plan, you can still benefit. Using the same $1,000 initial investment on a 10 percent yielding Roth IRA and investing $1,000 each year for 5 years will result in a retirement savings of $7,326.12.