Investment Ideas for Low and Middle Income Earners

As the discrepancy in income between the rich and not rich continues to grow, the opposite is actually occurring in the variety of investment ideas for low and middle income earners. There are plenty of investing options and strategies available for those of us with low and middle incomes.

You might be holding off investing money because you think you can’t afford it. You can!

This article will tell you how even a little bit of money set aside each month can grow into a healthy nest egg for you and your family. You’ll get ideas about how to invest with a little bit of money, and how to invest on a low or middle income.

For starters, you can now open your own online discount brokerage account. This allows you to buy stocks and index funds for lower the cost of hiring a financial advisor.

With the growth of the internet, researching investment ideas for beginners and investment ideas to retire early is possible for everyone.

However, with differences in income, it makes sense that there will be differences in investment strategies…

Investment Ideas for Low Income Earners

If you don’t have a lot of money to invest it seems natural that your strategy would be to not take any risks with the money you do have. But, with the right budgeting strategies, saving and investing money is possible for this income group. It comes down to making choices about how you want to live.

Traditional low-risk savings options, like a savings account, no longer pay a high enough interest rate to keep up with the rate of inflation. This means you are essentially losing money leaving your savings in one.

So how to you make what money you can afford to invest grow?

Read: Smart Money Ideas For Women At Every Age

Find an Investment Option with Low Fees and Minimums

When money is tight, it is even more important that none of what you invest goes to waste. An easy way to do this is to invest using a discount brokerage or a robo advisor. Look for a brokerage or robo advisor that has a low minimum investment amount…ideally $0. Both options allow you to hold your money in account types such as RRSPs, RESPs, TFSAs and more.

Online Brokerage

An online or discount brokerage lets you buy and sell stocks online using your trading account. This method of investing in the stock market yourself reduces the cost of a traditional brokerage. You can build your portfolio using low-cost Exchange Traded Funds (ETFs). There is a higher risk involved because you need to do some research as to which funds you want to buy.

Read more about the Best Online Brokerages in Canada.

Robo Advisor

Another good investment idea for low income earners is a robo advisor. A robo advisor uses a combination of a computer algorithm and human advisor to create an investment portfolio for you. You will fill out a questionnaire about your risk tolerance and a robo advisor will invest your money into ETFs.

Read our step-by-step instructions, Simple Steps for Investing With a Robo Advisor.

The management fees are slightly higher than with an online brokerage, but still far less than using a financial advisor.

Click here for a detailed comparison of the Top Canadian Robo Advisors.

To narrow down your options, look closely at the investment fees you’ll need to pay:

Inactivity Fee – some brokerages require you to make a certain amount of trades a year to avoid a fee. This could be as little as only once or twice or year, but it could be more.

Account Transfer Fee – this is the amount that you will be charged by your bank to move your money into a new brokerage or robo advisor account. Many online firms and robo advisors will reimburse you.

Management Expense Ratios – these are fees you’ll pay to cover the costs of managing your investment account. They are expressed as a percentage. You’ll pay anywhere from 0.10% with a discount brokerage to 0.75% with a robo advisor.

Pay Yourself First

Set up automatic deductions from your paycheck or bank account on the day you get paid. Have a set amount of money transferred directly into your savings and investment accounts.

Common advice is to set aside 10 % to 15% of your take home income. However, if you are struggling to stretch your paycheck that may seem impossible. To begin, start by setting aside $25, then increase that when and if you can. The important thing is that you start!

Read: How To Budget For A New Baby – First Year Checklist

Decide if Your Money Should Go Into a RRSP or a TFSA

You want your savings to be invested in an account that is earmarked for long-term savings but is still accessible. You’ll either want to contribute to a registered retirement savings plan (RRSP) or a tax free savings account (TFSA). Both investment vehicles have their advantages depending on your individual circumstances.

Registered Retirement Savings Plan

RRSPs were introduced by the Government of Canada as a tool for Canadians to save for retirement. The money you contribute into an RRSP can be held in several accounts.

Some of which are:

• savings account
• mutual funds
• stocks and bonds
• exchange traded funds
• guaranteed investment certificates (GIC’s)

The benefits of a RRSP are that the money you contribute in a year reduces the amount of income tax you need to pay that tax year. The RRSP is a tax deferred account meaning that you contribute to it with pre-taxed money but you’ll be taxed on that money when you make withdrawals in the future. The rules around when you can withdraw money are also stricter.

To read more about RRSPs, click on Canadian blogger Emily’s article – RRSP Everything You Need to Know.

Read: How To Save Money On A Low Income

Tax Free Savings Account

The tax free savings account is another legitimate tax savings option for long-term savings, now that the total contributions limit has reached $69,500. In fact, the long-term tax savings of the TFSA could outweigh the immediate tax savings of the RRSP.

The money you invest is after-tax income, meaning you’ve already paid income tax on it. However, you won’t be taxed again when you make withdrawals.

Any investment gains made in your TFSA are not subject to taxation…ever. Even upon withdrawal. If your portfolio grows well within a TFSA…that could be a lot of tax free money.

Where the TFSA beats the RRSP is that the money in your RRSP will be subject to tax upon withdrawal. However, you will probably be retired and therefore in a lower income bracket and hit with less tax.

Read here for an in-depth comparison between the RRSP and TFSA.

A general guideline is if you are young and your income is low, contribute to a TFSA first. You will get more benefit by contributing to an RRSP later in life when your income is higher and you are in a higher tax bracket.

Read: Top Tax Return Software For Canadians – File For Free

Investment Ideas for Middle Income Earners

For the middle class, the dream of retiring comfortably with a hefty investment portfolio is possible. The key is to live within your means in the present.

Here are some investment ideas to set you up for a wealthy retirement.

start saving money early and stay the course

This advice holds true for any income group looking to build a robust nest egg. For middle income earners, the amount you can afford to save now has a better chance of resulting in a six or seven-figure egg.

If you are in your twenties or thirties, start by investing 10% of your net income. That will be about $276 per month on a $40,000 salary. Up your contribution 3% annually and earn 6% return and you will hit $1,000,000 by your mid-sixties.

If you are past your thirties, saving $1 million is still doable, but your monthly contributions will need to start at $1,300 for a 45-year-old.

Read: How To Start An Emergency Fund In Canada

contribute to a pension and a RRSP

In order to retire rich, you need to make a serious commitment to saving money each month. Putting money aside and living on less has to become a way of life.

If you are a salaried employee, set-up automatic payroll deductions and join any savings programs (pension plan, group RRSP, stock purchase plan) your workplace offers. Many employers will match at least part of your contributions. Every time you get a salary increase, increase your contribution amount.

Everyone, with or without a pension program, should also contribute to an investment account such as a RRSP. Aim to max out your RRSP contributions each year. Most Canadians don’t do this. It will take discipline to reach this goal.

The RRSP contribution limit is %18 of your income. If you earn $50,000 per year, that works out to $750 per month.

Remember, the amount you contribute will reduce your taxable income…an added benefit for middle class earners.

buy the house and car you can afford

As a general rule, you should spend no more than 30% of your monthly gross income on housing. If you are a renter, that includes utilities. If you own a home, that number includes the interest on your mortgage, property taxes, and maintenance.

Purchasing a big house is tempting, especially if you have a family and want each child to have their own room. But, you’ll have a difficult time reaching your retirement goals if you are bogged down with expensive mortgage payments indefinitely.

The same holds true when purchasing a car. Unlike a house which can appreciate in value and be considered an investment, a car is worth less the more you drive it.

If you have the extra money after putting aside your savings goals each month, than go ahead a buy a fancy car. But, if you can’t contribute the necessary amount each month into your RRSP, try driving a used vehicle.

Read: Smart Ways To Save Money On Back To School Expenses

Have an investment plan

Now that you are spending less than you earn each month, it is important that you put your extra money into savings. However, in order to retire with $1 million, your money needs to grow.

A standard savings account will only earn you around 1% interest. This will not get you to your goal. Therefore, like the above investment ideas for low income earners, you need to find an investment option with low fees.

The right solution for you will be the one you are comfortable with for the long term.

build a diversified Investment portfolio

Canada’s mutual fund fees and expenses are high. The average funds management fees are over 2% per year. These costs make earning a 6% return on your retirement savings tricky.

As discussed above, there are good options for those of us willing to manage our own investments. Using an online brokerage or robo advisor can help you build a diversified portfolio of stocks and bonds without the 2% fee.

invest in Real Estate

There are two different ways to invest in real estate in Canada.

Active investors invest by owning their own principal residence, owning a rental property, or flipping a house.

Passive approaches to real estate investing include options such as Real Estate Investment Trusts (REITs) and buying stock in companies that own income earning real estate. Choosing a passive approach is obviously less work and requires less of a start-up investment.

For more real estate investment options for individuals with low or middle incomes read Best Ways to Invest in Canadian Real Estate in 2020.

make a budget – investment ideas for low and middle income earners

Whether you are working with a low income or middle income, before you invest you need to balance your budget. It is hard to set aside money for savings if your are spending more than you earn. Without a budget, many of us are left at the end of the month wondering where our money went.

Creating a budget based upon your income and keeping track of your expenses allows you to determine what extra money is left for savings.

An important step when making a budget is to make a list of goals. Determine what you are saving for and how much money can you set aside each month to reach those goals. Goals keep you motivated.

For a step-by-step guide on how to make a budget, read our How to Make A Budget post.

If you need a free, printable budget planner and expense tracking worksheets to help you out, fill-in the quick form below and they will immediately arrive in your inbox. They are simple to use and help you to include all the expenses you might otherwise forget.

Do You Need A Complete Budget Tool Kit?

Tools I’ve Developed To Help You Stay On A Budget And Get Out Of Debt

If you haven’t yet started a budget or if you are having difficulties organizing your current budget plan, don’t worry, I have a great new resource to help you. I’ve designed The Family Budget Planner to help my family, and yours, build a practical, time-saving budget plan.

No other budgeting planner is specifically designed to help families manage their finances. It will help you set goals for your money, track your income and expenses, pay-off debt, monitor your savings, and, of course, create a workable budget plan.

The Family Budget Planner is created with family living in mind and includes savings and spending trackers just for the kids. I have 4 young daughters, so I wanted to make a budget planner that includes all the kid’s expenses. There is also a mini-budget sheet for children to use – what a great way to teach kids about money!

If you are the kind of person who likes to have a ready-made plan (with all the organizational tools you’ll need) laid out before you, then The Family Budget Planner is designed for you. Get it and get ready for a sunnier financial future.

In Conclusion

When it comes to investing, the playing field isn’t entirely even yet. There are some investment options only available to very high income earners. Private equity assets refers to businesses not traded on the stock market. To invest in private equity and hedge funds you need to have serious money that most of us don’t…a minimum $1 million for hedge funds.

However, that doesn’t mean your investments won’t preform as well as the high-ticket options. In fact, hedge funds aim for huge gains and come with the cost of huge fees. In fact, there are many years in which they have failed to out-perform the stock market like promised.

So, don’t buy in to the notion that you need to already be rich to invest and retire rich. There are good investment ideas for low and middle income earners out there.

Just get started now, follow some of the ideas listed here, and keep with it!

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