Investing on a Shoestring Budget

Written by Ismail Abdur-Rahman, CEO

Since my last post, I have received a deluge of inquiries about how a person living paycheck to paycheck can invest. I'll admit it: at first blush, the thought seems too daunting to be plausible, but rest assured there are strategies that you can use to put you in position to invest, even on a shoestring budget.

First: Evaluating Everything
The first thing you will need to do is take stock of your entire situation. OK, you're living paycheck to paycheck, but why? Is it because you have a salary that doesn't accommodate the cost of living in your area? Are you heavily in debt with student loans, credit cards, or a car payment? Are you guilty of making poor financial decisions and living beyond your means?

If you are honest with yourself - and sometimes you will need to ask the people who are closest to you for input in order to get to the bottom of things, provided, of course, that they feel comfortable enough to speak objectively and tell you the brutal truth - you will narrow down the cause of your financial situation to a few things that can be better controlled. Once you have identified the root causes of your financial distress, it's time to move on to the second step.

Second: Money Management
I'm not just talking about giving up your weekly Starbucks latte. I mean reconfiguring your spending patterns to better accommodate your now, in order to craft the future you desire. Unfortunately, this is where many of my clients struggle to adjust. You know that expression, "One step forward, two steps back"? Well, what we want to do here is the same thing, but in reverse order. We can eventually get you moving forward, but you might need to take a step or two back first. 

Learning where the waste is in your monthly budget is akin to a doctor diagnosing an illness. This has to happen first, and then we can get to the treatment and recovery stages. In general, most people tend to overspend on rent, food, and transportation. So, I'll cut right to the chase. If you are living on a shoestring budget, all it takes is for you to fall ill and miss significant time at work in order for you to be unable to pay your rent. The first thing you will want to do is move into a cheaper place as soon as possible. Try to downgrade your accommodations to reduce the amount you spend on rent by 20-30%. Maybe this means moving further away from the heart of the city, or finding a smaller place, or an older place. If you're single, take on a roommate to share the rent and utility expenses. If you're a homeowner getting beaten up by your mortgage payment, dump the house and look for a fixer-upper. If you spend $20k on repairs, but your monthly expense is $500 cheaper, it's a long term win.

With the plethora of mass transit options and ridesharing services available, it makes little sense for someone on a tight budget to commit financial suicide by taking on a car loan. A young client of mine recently told me that his car payment, which usurped 40% of his monthly income, was an asset. WRONG! I had to break the news to him that his car wasn't an asset until he owned it free and clear. Until such time, the car, along with the insurance payment, is a liability. We figured out that if he used public transport and Uber, he could save $300 per month over what he's wasting on his car payment.

Food can be easier to manage, though you will certainly give up convenience. Keeping your diet simple allows you to buy in bulk. If you can buy most of your food stuffs from a wholesaler like Sam's or Costco, you can save a tremendous amount of money in a few months. Sure, you'll likely need to invest in a deep freezer, but that's a one-time expense that will pay for itself in 30-60 days. Avoiding designer foods and pricey grocery chains is a must while you are in the transition phase; Starbucks is included here. Eat like you're poor for 120 days, and we can get on to the next step.

Third: Asset Acquisition
Now we get to the good stuff. While it's possible to get here in fewer than 120 days of money management, the reality is that it typically takes people a few months to get their lifestyle adjustments under control. After that - game on!

Depending upon how effectively things have gone in the money management stage, clients usually arrive at this threshold with thousands of dollars that are uncommitted to taking care of basic necessities and debt obligations. Just the thought of that, especially for someone who has been drowning in debt and bills, is liberating. The most frequently uttered advice at this stage is, "Start slowly." Resist the temptation to buy things just because you now have some extra cash. Remember: the high level goal is avoiding a working retirement, not having luxury and convenience in your youth.

Let's start with the basics. What is an asset? If we avoid finance-speak, an asset is something that you own that can bring you value in the future. Pretty simple, right? Of course it is. So that's why it can be helpful to start slow. I have one client who has a thing for designer handbags, so we drafted a plan to strategically acquire designer bags at discount prices and then sell them at a 500% profit a few months later. This is a simple example of everyday items that you might be able to acquire now and sell at a profit later. However, a more aggressive strategy is needed if you really hope to make it through a retirement that could last 20-30 years or more.

There are a number of things that must be considered when you want to begin investing in earnest, but you are far better off consulting with a financial advisor in person at this stage. However, some general guidelines to consider are the following:

  1. Building a well-balanced investment portfolio can help you manage risk, in addition to ensuring regular flows of income to sustain you well into your retirement.
  2. Investing in commodities like gold, silver, and oil is the best hedge against the currency fluctuations that accompany a changing political climate.
  3. Saving money beyond the amount that you need to live on will eventually cause your wealth to decrease because inflation causes the value of money to decrease over time.
  4. Investing in a business, even a franchise would suit this purpose, is a good way to ensure regular cash flows that can be used to acquire additional investments.

While this was in no way an exhaustive list of suggestions for creating wealth on a shoestring budget, following these basic guidelines should put you on the road to financial recovery, and ultimately financial freedom. And let's face it, isn't that what we all want?