How to invest on a small budget
Many people are under the impression that they need a lump sum of cash to begin saving and investing for the long term. The process, however, can begin with just a few thousand dollars. If you have the discipline, you can achieve your goal over the long run. Here are some tips to maximise your long-term investments.
You will begin your dream of achieving financial freedom in the long run by saving a small fraction of your income every month. Although income levels are low relative to expenditure in many instances across Jamaica, it is necessary not to spend all that you earn. It is advised to put aside at least 10 per cent of your income, no matter how small it might be, and you will be surprised to see how it adds up over time. For example, if you earn $10,000 per week, save at least $1,000. That will give you $4,000 per month and as much as $52,000 for the year. If you earn $2,000 a day, try as best as possible to save $200 at the end of the week – that is $1,000 – and at the end of the month you have $4,000; at the end of the year you have $52,000.
This $52,000 is more than enough to open a stock trading account, where you can buy shares in profitable companies. Your investment returns will come through dividend yield and stock appreciation. If you practise this for a few years, it will become a habit and you are on your way to long-term financial stability. The average Jamaican in the lower-income bracket might not want to do this, they are more willing to spend this amount on some consumer items, like fancy dinners, clothing, entertainment and liquor. It is sometimes difficult for many people to find the discipline to save, but it is necessary, especially if you desire long-term financial freedom.
reasons to borrow
It might be difficult for many Jamaicans to save because the amount of money they earn per month, or per week, is less than the amount necessary to cover their expenses. As a result, they have to borrow the remainder of funds. But borrowing to consume or cover expenses on a consistent basis eats away your income. You will have to borrow more and more each week/month to cover the previous month’s deficit. In this case, more and more of your future income will go towards covering debt and you will have no savings put aside. You must always spend less than you earn.
Some loans carry different interest rates, depending on the institution or company from which you borrow. If you must borrow, it is important to shop around for the cheapest loans. There are many loan companies, creating competition in the market. Take advantage of this as best you can. Use your bargaining power. Sometimes you can get a loan from someone other than a loan company, but not every time. Use this option when it is available to you.
We live in a consumer-driven world, where people increase their consumption through credit that they repay in the future. There is nothing wrong with balanced, sustainable borrowing, where the borrower plans his path of debt repayment, especially for consumer durable items. We have to learn as well how to use debt wisely. Borrow at low interest rate and invest at a higher rate of return.
There are times when we need emergency funds and must borrow to cover expenses. This happens if we don’t have rainy day savings or other reasons. The key here is to repay these debts as soon as possible. Short-term borrowings often are associated with high interest rates. These can trap you in a vicious cycle of constant borrowing to consume as well as to pay off debt. This is a recipe for long-term financial dependence. Do not let this happen to you.
Dr Andre Haughton is a lecturer in the Department of Economics on the Mona campus of The University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org.