Can i invest if i'm downright broke? Can i still invest if i only have little money set aside? The answer is definitely yes because i'm single and poor but with proper plan and discipline, i manage to build a decent portfolio, generating a good stable 5~6% dividend yield and along with some good capital gains after a few years.
Before i start, I would like to first apologize if i didn't include individuals who already had their own family and children or attached as target audiences in this post because if i feel when you are in this kind of situations, how you manage your finances will be way different from people who are single, and as i'm single too so my tips and guide will be too biased towards individuals who are single. However, couples or family people don't leave straight because maybe you will find some of my tips helpful. Without much delay, let's start the guide.
Calculate The Monthly Fixed Amount You Will Set Aside for Individual Expenses
This is the most important first step and crucial, especially with the high cost of living in Singapore. For me, i had calculated my own monthly allowance will be $400. For me to live comfortably while frugal, i personally think $400 is enough for anyone per month. Here is the breakdown of my $400.
- $100 for travelling expenses.
- $100 for food & beverages.
- $50 for my phone bills and the subscription of this blog site.
- $100 for buying daily neccesities and ingredients for home-cooking.
- Surplus of $50 remaining will top-up in either of the above four pointers. Maybe special occasions calls for special meals, buy presents etc. Sometimes you go out socialize, you may need additional spending. Or you need to buy some new clothings or just pampering yourself.
This is the budget i stick with for the past 2 years, thanks to Covid-19 but ultimately, it improve my investment plan quite significantly. Before that, i do spend additional on my vocal singing class but i still manage my expenses carefully by setting a fixed budget monthly. So this is my version of Singaporean's frugal yet comfortable monthly budget. After you did this important first step, the next few steps will be way easier.
Setup 3 Different Bank Accounts
When you put your savings and spending account all together, there will be temptations which will ultimately spoil your investment plan, so you will need to setup these 3 different bank accounts to deter temptations and smoothen your investing journey.
- 1st Account will be where your salary and future dividends be deposited. Use this account for trading stocks only!
- 2nd Account is where you transfer the fixed monthly budget from your monthly salary to.
- 3rd Account is your rainy day fixed account, not touching it unless it's raining real heavy for you.
Settle Your Debt And Save For At Least 6 Months Worth Of Rainy Day Savings First
Before you even start investing, you should probably clear all your students debts, outstanding bills or loans because if not, you are most likely to struggle for a long time due to all this factors draining you financially. Whatever you earn from investment will go down to waste if you still carry debts with you for a long period of time. So after you set aside a fixed monthly budget for yourself, the remaining all should be paying off all your debts until you are clean and if you don't have rainy day savings yet, save until you hit your target which can last you for 6 months. Once this is done, let's move on.
Find 3 Companies You Are Familiar With
I would highly recommend picking your individual stocks because these are the stocks you had research carefully instead of putting your money in a basket of stocks where there are so many companies to research and some you don't even understand what they are doing. I highly recommend blue-chip stocks and/or REITs first for a more stability choice, there is still risk but affordable risk especially when you are very broke. Below are the few things i look out from individual company before i went to purchase their stocks for long term.
- Their share price so i can determine how many shares i can purchase and also roughly gauge how much you will be spending or saving up for the purchase.
- Their share price history with a range of 20 years because you will see how they perform through various economic or global crisis.
- Their dividend payouts history.
- If you spent 1 minute on their website and you feel like not wanting to read on or you don't understand, please move on to next company to research.
- Read up their latest annual report.
- Look through their portfolio of assets they holding on.
- Look through their board of directors and managing team.
- Easily accessing the company's performance because either i am using their services or i can easily see their physical assets' performance like go shop in their shopping malls, brought their products, or working in their company, etc. The main point is that you can easily see their progress besides just googling for news and their website.
- For REITs, look through who are their tenants who occupy their space or what are the companies.
Did i said a few things earlier? Yup, these are the first few things i look out for when i want to purchase the company's shares for the first time. Of course, there will be some other things to look out or dwell into but the above are the basics, and the more you research and the longer you are in investing, you will gain more knowledge and will expand or modify your requirements to suit your needs.
Start Doing Your Calculations For Your Investments
For example, you had already picked at least 3 companies to purchase their stocks, now you need to perform calculation on what is tge budget you set for each purchase and how many shares you want to purchase from those companies within your tight budget you had set every month.
if my salary is $1800, my take home amount will be $1040, after deducting the compulsory Singapore Government Saving Scheme, which is 20% of my salary into my Central Provident Fund (CPF) Account, and then deduct the fixed monthly budget i set for myself ($400).
Do take note that the amount of dividends you earn from buying a stock depends on how many shares you bought and/or how much the company is paying per share for the dividend payouts. In addition, most stocks are purchased in lots which is 100 shares per lot. With only $1040 per month available for me to invest, i can either continue saving up until i can buy a really good valuable stock but costing a premium of like let's say $28/share or stick with a relatively good stock at a cheaper price of $4.50/share.
Another option is to save up for a long time then wait for the opportunity to buy when those really great and valuable companies you find are on a discount price. This is the point where Microsoft Excel comes in handy, do a list, do your prediction calculations and your actual trading calculations tracking because there are so many numbers, it's better to pen it down somewhere.
Reinvest Dividends (If Applicable)
Once you get the ball rolling for your investing journey, It's really tempting to straightaway use the dividends earn for your own individual purpose but the thing is, how you use the dividends will greatly affect your investment earnings in the long run.
When you use the earnings of your investments to reinvest, the magic of compounding interest will happen.
You own 10000 shares of company A, costing $5 per share and paying $0.15 dividends per share per year. You will earn 10000 x $0.15 = $1500 in your first year with this company. Now you use the $1500 earned to reinvest in the same company, assuming share price didn't change, your $1500 earnings will buy you 300 more shares. In the subsequent year, you decide to purchase another 10000 shares, you will have 20300 shares in total and your new earnings will be 20300 x $0.15 = $3045. And so the cycle repeats.
But if your earnings doesn't allow you to buy at least 1 lot of the same or other company's share, then you will have to adjust your strategy which i will explain later.
You own 500 shares of company A, costing $5 per share and paying $0.15 dividends per share per year. You will earn 500 x $0.15 = $75 in your first year with this company. Now you use the $75 earned to reinvest in the same company, assuming share price didn't change, your $75 earnings can only buy you 15 more shares. Take note that you can only buy shares in lots which is 100 shares per lot so when your earnings are small and not enough to buy a lot, this method doesn't work until you upsize your dividend earnings.
Therefore, compounding interest doesn't work for a broke man like the above example and so what is the next option to put your dividends to good use? Using the above example for reference, you should save your dividends first, then continue purchasing shares from company A to generate more dividend earnings, then save until the point when the accumulated dividends savings can net you at least one lot of shares. For company A, it's $5/share means 1 lot will cost you $5 x 100 = $500.
- 1st year: 500 shares, $75 dividend earnings (saved)
- 2nd year: you pumped another 500 shares, so will be 1000 shares with $150 dividend earnings (saved)
- 3rd year: you pumped another 500 shares, so will be 1500 shares with $225 dividend earnings (saved)
- 4th year: you pumped another 500 shares, so will be 2000 shares with $300 dividend earnings (saved)
- 5th year: you pumped another 500 shares and in addition, you use all the past 4 years of dividend earnings ($75 + $150 + 225 + $300 = $750) saved to buy more shares, which allows you to buy 1 more lot of shares costing $500 with $250 leftover for your future reinvestment usage.
Remember, the average global inflation rate is around 3% every year, which means even if your money is sitting duck in your savings account, it will consistently lose 3% of its value every year and that same amount money you saved will lose its original spending power gradually. The small little interest your bank gives you every year won't be able to cover that so one of the best option to beat the inflation rate is to invest. Personally, my portfolio generates 4.7% income from the amount i put in (excluding capital gains) so even though i beat the inflation rate by a small percentage, it's way better than letting my money lose value in default savings account.
This section is long-winded isn't it but i must try my best to explain clearly because you are using real money to invest and when you are poor, you really need to be calculative and shrewd in your investment plans. The longer you are in this field, the easier it is to manage your budget, know what you are looking for when you invest in a company and you will find out more flexible ways to save and invest without hindering your everyday life.