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Investing on a Modest Salary


Get the most bang for your buck.

People's financial habits these days are as diverse as the foods they like or the music they listen to. Gotta-have-it materialists max out their credit cards to live far beyond their means; family-oriented folks stockpile funds to pay their unborn children's college tuition; and single-income, underpaid workers in expensive cities struggle just to cover all their bills each month.

No matter what your fiscal profile, saving money is one of the greatest challenges modern-day consumers face. In fact, for people who feel as if they're living paycheck to paycheck, setting something aside each month is often not even on their radar. According to financial advisors Melinda Donovan and Richard Lee, however, even individuals who earn a modest income -- say, $50,000 or less per year -- can learn to make smart savings and investment decisions that won't break the bank.

Save It for a Rainy Day

Donovan, a senior vice president and trust officer at Cambridge Trust Company in Cambridge, Massachusetts, says, "The first, most critical rule for every American is, you have to save. You might be making only $30,000 a year and living in a pricey part of the country, but you should still make it a priority to conserve some portion of your income every month -- even $100 makes a difference. Saving money is just like exercise -- three minutes a day is better than nothing."

Donovan adds that people have all kinds of motives for opening savings accounts: making a big purchase (such as a new car or a house), preparing for an emergency, or taking a trip for pleasure. No matter what your reasons, any incentive is a good one. Beyond its obvious financial advantages, saving money is psychologically beneficial as well; Donovan explains that the sense of autonomy it provides, as well as the knowledge that you have some measure of control over your fiscal future, will not only bring you peace of mind but also make you more self-confident.

Workers' Comp

If you work for a company that offers a 401(k), you're in luck -- this type of tax-deferred plan is one of the most effective money-saving vehicles. Donovan advises, "Contributing the legal maximum is ideal, but even a tiny fraction thereof is preferable to nothing, especially if your employer will match your amount -- it's like throwing money away not to take advantage of that, because it can be an incredible investment return." However, she also points out that even a matchless 401(k) is valuable, since the interest, dividends, and capital gains accumulate tax-free.

If you're self-employed or your employer doesn't offer a 401(k) -- or even if you do have a 401(k) and simply want a second retirement account -- an alternate option is to open an IRA, another type of tax-deferred savings plan. A Roth IRA -- for which you're eligible if your taxable income is less than $110,000 as a single filer or less than $160,000 as a joint filer -- may be more convenient than a traditional IRA because it has fewer withdrawal restrictions and requirements, but either type is an excellent means of growing money for your golden years.

Take a Chance -- Play the Stock Market

Although a personal savings account and a tax-deferred plan are the most necessary building blocks of your savings structure, you might also consider investing some of the money you set aside each year in the stock market. According to Donovan, the primary consideration for aspiring investors of modest means should be diversification -- and "the only way to achieve a diversified investment portfolio is to invest in a stock mutual fund." Stock mutual funds, also called equity mutual funds, are ideal for younger people who have a long-term horizon (i.e., anticipate living for another fifty years) and a tolerance for some risk -- because, as Donovan points out, "if you invest in stocks, you have to be prepared to lose money."
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