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The good news
The good news about investing is that it's not like buying an automobile or a house in that it doesn't require a big down payment. You might think that trying to save money to invest is an uphill battle and maybe even a futile one but it doesn't have to be. Here are some ways that you can invest on a shoestring budget.
"Keep the change"
One very low cost way to save money is Bank of America's "Keep the Change Program." This represents only a small start but is meaningful. The way it works is that the bank rounds up every purchase you make to the nearest dollar and then deposits the change daily into your savings account – and it's all for free. The bank will actually match a small portion of your savings and mail you a statement at year’s end showing how much you’ve saved. You could then invest this money.
I have a friend who calls 401(k) plans the working person's best friend. And this is not far from the truth. If your employer offers a 401(k) and especially if it will match some portion of what you save, this is usually an amazing way to invest. However, before you jump in, check to see if the 401(k) plan has been able to beat the S&P 500 on a consistent basis. In the event it hasn't been beating the S&P 500 regularly, you might be better off investing the money yourself.
When there is no 401(k) plan
Unfortunately, many small businesses do not offer 401(k) plans and yours might be one of them. In this case, you will have to look for some alternatives. One good one is called Exchange Traded Funds (ETF). These are good investments in that they do not require you to pick stocks yourself. These funds are fairly similar to what are called index mutual funds but trade more like a stock. If you choose an EFT, you will have one single investment that includes a large number of stocks and provides good diversification. One example of an EFT is the SPDR trust, which attempts to copycat the performance of the S&P 500 . It has shown a good return and saves you the hassle and costs of trying to purchase 500 separate stocks.
An automatic investing plan
When you have saved enough money you feel you can begin investing, you should check out some of the low-cost online brokers such as Sharebuilder.com. It is like some of the other online brokers in that if offers an automatic investing plan, one-time stock trades and a money market account that has a competitive interest rate. Share builder requires no minimum investment; you can invest any amount of money you wish and it doesn't charge you if your account remains inactive for any period of time.
Why paying off debt makes more sense than saving money
If you are heavily in debt, you will want to eventually start saving money. But in the short-term, it makes much more sense to pay off that debt. This is because the interest you're paying on your credit card debts far outstrips any interest you could earn on your savings. If you check the interest on your credit cards, you'll probably find you’re paying 18% APR or more. Now, compare that with the 1% or 2% you would likely earn with a savings account or CD. A better solution is to let our debt counselors negotiate with your credit card companies to get both your balances and interest rates reduced so that you could pay off those debts in 24 to 48 months. You could then use the money you've saved to invest and you would no longer be investing like a pauper.