Investing on a Limited Budget

As a smaller investor on a limited budget, it is possible to amass hundreds of thousands of dollars in stock market wealth over the long term. A $100 monthly investment that earns a 10 percent annual return grows to $250,000 over thirty years. 10 percent annual returns are possible, because the S&P 500 U.S. stock market index has averaged 11 percent annual returns since its 1957 inception. When investing money on a limited budget, you must first outline your financial goals, prior to saving money into the right types of accounts.

Investing on a Limited Budget: Financial Goals

Financial goals provide for a sense of purpose and a motivation to stay the course with your investment budget. Common financial goals include saving up enough cash resources to provide for tuition payments, retirement, and a generally improved standard of living. You will categorize your goals according to total costs and time frame. For example, you may need $500,000 to finance a retirement to the Great Smoky Mountains within the next 30 years.

Investing on a Limited Budget: Cash Flow and Projections

With a list of major life goals in hand, you will pull up an online financial calculator and toggle through projections. After using the financial calculator, you can determine the amount of money that you should be saving each month at a projected rate of return to meet your goals. You will reconcile this information against your current finances -- to determine whether your goals are actually realistic. To do so, you will subtract monthly expenses away from monthly income -- to calculate free cash flow available each month to make investments. If your goals appear out of reach, you must eliminate discretionary spending from your budget. Discretionary spending goes towards consumer goods, such as concert tickets, designer clothes, and luxury vacations that do not add economic value to your bottom line. You may also consider bringing your lunch to work -- to save at least $100 each month for investing into financial markets.

Investing on a Limited Budget: Mutual Funds

The Securities and Exchange Commission (SEC) recommends mutual funds for automatic diversification and professional money management. One mutual fund share represents claims over a larger asset pool that owns dozens of different securities. With an actively managed mutual fund, professional money managers will attempt to beat the market and deliver superior investment returns. With a passive mutual fund, your cash will be invested in a standard basket of securities that simply keep pace with a particular stock market sector. When investing on a budget, you may purchase mutual fund shares either through your 401(k) plan at work or directly from fund companies for as little as $50 per month.

Investing on a Limited Budget: Direct Investment Plan - Dividend Reinvestment Plan

A direct investment plan is also recommended for smaller investors, because it allows you to bypass expensive brokerage commissions, when you buy stock directly from a corporation. If applicable, you can opt to have your dividends reinvested to automatically purchase more shares each quarter. For enrollment materials, you will visit a corporation's official website and click upon its investor relations' tab. In most cases, you can participate within the direct investment plan for a $50 monthly minimum.

A direct investment plan can help a beginner to invest with pride and stay the course for years to come. For example, a road and car enthusiast may opt to purchase shares of Exxon through his direct investment plan.

Investing on a Limited Budget, Sources:

SEC: Direct Investment Plans

SEC: Mutual Funds

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