What are the 7 best investment choices for frugal people?

Ralph
00:00:00

Got a question for you today. Have you ever felt like you're too frugal to invest?

Maybe you're so careful with your money that the thought of putting it into investment seems risky or just plain wasteful? Well, stick around, because today we're diving into a topic that just might change your mind.

I'm going to share with you seven of the best investment choices for frugal people, and I've got a story that will show you how being thrifty and being a smart investor can go hand in hand.

Narrator
00:00:28

Welcome to the Ask Ralph podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting. Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial.

Now here's your host, Ralph Estep Jr.

Ralph
00:00:57

On yesterday's show we tackled the question, what is the tax impact of getting a lump sum versus an annual payout of retirement? I broke down the pros and cons of each option and how they affect your tax situation.

And let me just tell you, that's some crucial information for anyone whos planning retirement or is already in retirement. So I'm going to encourage you to go check it out. I received a message from Hillary in Hawaii.

Hillary writes this hey Ralph, I've been a faithful listener of your show for the past year and its really helped me get my finances in order. I'm proud to say I've managed to save quite a bit of money by being frugal, but now I'm facing a dilemma.

I want to start investing, but I'm worried about losing my hard earned savings or paying some high fees. What are some good investment options for someone like me who wants to grow their money but is naturally cautious and frugal?

Hillary, thanks for being honest, and thank you for your question.

It's great to have dedicated listeners like you sending in those questions, and I'm thrilled to hear that the show has been helpful in getting your finances on track. That's the reason I did it. And listen, your question is spot on, and I know there are many others out there facing that same dilemma.

Hillary, your question reminds me of a passage from the Bible.

In the book of Matthew, chapter 25, verse 14 to 30, Jesus tells the parable to tell now this is a bit of a long scripture, but I want to read it because I think it's so useful and addresses your concern. Right on. Again, it will be like a man going on a journey who called his servants and entrusted his wealth to them.

To one he gave five bags of gold, to another two bags, and to another one bag each, according to his ability. Then he went on his journey. The man had received five bags of gold, went at once and put his money to work, and gained five bags more.

So also, the one with two bags of gold gained two more. But the man who received one bag went off, dug a hole in the ground, and hid his masters money.

After a long time, the master of the house servants returned and settled accounts with them. The man who had received five bags of gold brought the other fives. Master, he said, you entrusted me with five bags of gold.

See, I have gained five more. His master replied, well done, good and faithful servant. You have been faithful with a few things, I will put you in charge of many things.

Come and share your master's happiness. The man with two bags of gold also came. Master, he said, you entrusted me with two bags of gold, see, I have gained two more.

His master replied, well done, good and faithful servant, you have been faithful. With a few things, I will put you in charge of many things. Come and share your master's happiness.

Then the man who would receive one bag of gold came. Master, he said, I knew that you're a hard man, harvesting where you have not sown, and gathering where if you have not scattered seed.

So I was afraid, and I went out and hid your gold in the ground. So here is what belongs to you. His master replied, you wicked, lazy servant.

So you knew that I harvest where I have not sown, and gather where I have not scattered seed. Well then you should have put my money on deposit with the bankers, so that when I returned, I would have received it back with interest.

So tight the bag of gold from him, and give it to the one who has ten bags, for whoever has will be given more, and they will have an abundance.

Whoever does not have even what they have, will be taken away from them, and throw that worthless servant outside into the darkness, where there will be weeping and gnashing of teeth. You read that and you just feel the passion in that.

But I think it's so important, because it teaches us that God wants us to be good stewards of the resources he's given us. And being frugal is a great start, Hillary. But God also wants us to be wise, and he wants us to make the most of what we have.

So let's talk about how we can do that without compromising our frugal nature. Hillary, your question actually reminds me of a client I worked with a few years back. I don't use names. We'll call him Tom. Now, Tom was this guy.

He was the epitome of frugality. He clipped coupons, he drove a 15 year old car, and he could stretch a dollar further than anyone I ever met. Let's face it, Tom was cheap.

But when it came to investing, he was paralyzed with fear. And he had this indecision. So he came in with a similar concern to yours, Hillary. And he managed to, Tom.

And managed to save up a significant amount of money.

He did it through his frugal lifestyle, but it was just sitting in some low interest savings account, and he started to feel like he needed to do something more with it. But he was terrified, I mean, petrified of losing all of his money or getting dinged with nickel and dime fees, he called it.

I remember him sitting down in my office. His hands were clenched tight, and I could see the worry lines in his forehead. And he said this, ralph. He said, I've worked so hard for this money.

The thought of losing it keeps me up at night. But I also know that if I don't do something, inflation will eat away at the value. What can I do?

And listen, we are all dealing with inflation right now. It is terrible.

I've got clients who are retired who have had to re enter the workforce because their retirement savings or their retirement pensions just aren't enough to keep up with inflation. But I remember that day, I leaned forward, I said to Tom, listen, dude, being frugal doesn't mean you can't be a smart investor.

In fact, I said to him, I said, listen, a frugal mindset actually gives you an advantage because you're already good at avoiding unnecessary expenses. And that's a crucial skill in investing.

And what I said to him next was, what we need to do is find investment options that align with your frugal nature while still giving you money the opportunity to grow. I said, you've got this frugal nature, which is fantastic. You understand?

You don't want to get dinged fees, but you also have to be wise in your stewardship and put this money to work. And so, Hillary, guess what we did. That's exactly what we did. We put it to work. And I'm going to share with you and all of our listeners today.

We're going to talk about seven of the best investment choices for frugal people. Now, these are options that can give you good returns without hitting you with high fees, requiring a huge initial investment.

So, are you ready now, let me start by saying I am not an investment advisor. I'm an accountant, and I help people manage their money. From the standpoint of how do we allocate things? I'm going to encourage you.

When you get into the actual investments, we can partner together with a broker. So let's jump into number one, and that's things called index funds. And these are my top recommendation for frugal investors.

And it is a type of mutual fund that tracks those specific market index. And I don't want to lose you into details, but something, for example, like the s and P 500. So it's a broad market exposure.

The benefit to these things is they have low expense ratios and low turnover rates, which makes them tax efficient. You're not having a bunch of capital gains and all that stuff going through.

So, for Tom, we started him on what's called a low cost s and p 500 index. And guess what? It had an expense ratio of 0.03%. What does that mean in real dollars? That means for every $10,000 invested, he only paid $3.

That's right, $3 in annual fees. So that is my first and highest recommendation. That's those index funds. Let's look at the second thing.

And these are things that you may have heard called ETF's. So what they are is they're exchange traded funds, and they're similar to the first one I talked about.

They're similar to those index funds in that they have low fees, they have broad market exposure. The thing that they do is they're traded like stocks, which really gives you more control over when you want to buy and sell them.

So, for Tom, we added a total market ETF to his portfolio to increase his diversification even further. I worked with his broker. We had some meetings together, and we put him into these.

The third thing, and this one isn't technically an investment, but it's a high yield savings account. See, Tom had his stuff parked in the traditional past book saving account, whatever you want to call it.

But these accounts, if you're really conservative, can offer you better interest rates than those traditional savings accounts. And the best part is, you have no risk. So, for Tom, that was important.

So he kept a portion of his money in a high yield savings account for those emergencies and those short term goals he wanted to make. He didn't want to take it and put it all in these investments. He wanted to keep his emergency fund in a place where he could get to it real quickly.

And that's why we picked those high yield savings. Another option is what's called a certificate of deposit.

Now you probably heard them called CDs and these are the perfect for a risk averse investor because they have a guaranteed return. When you buy that cd you know what the rate is going to be. And truth is they're going to usually be better than new savings accounts.

Now the catch to that is you've got to lock up your money for a set period of time. So in Tom's case we use what's called a CD ladder strategy by spreading his money across CDs with different maturity dates.

So example, we bought a six month cd and a twelve month cd and an 18 month CD. That way every six months he had this CD that was maturing.

If he needed to subsidize his emergency account or he needed for something else, he wouldn't lose any interest by having to cash that in early. Lets move on to the next thing. And that's my number five on my list here. And that's us treasury securities.

Now these are among the safest investments available. These are things like treasury bills, treasury notes and bonds.

And the coolest part of this is you buy them directly from the government through treasurydirect.gov and I'll put a link to that in the show notes. And by doing that you're avoiding those broker fees entirely. And Tom loved this idea.

He loved the idea of lending money to the us government and earning interest on it. I don't know if I share that same love of lending money to the government, but for Tom it worked. Let's look at the next thing. That's number six.

And these things are called dividend reinvestment plans. You may have heard them called drips.

So what these plans allow you to do is buy stock directly from a company and then reinvest those dividends to buy more shares. And there's really no or no fees because you're dealing directly with that company.

So in Tom's case we set up a drip with a stable dividend paying company because we wanted to find something that was stable, it would pay dividends and he could take those dividends and roll them back into buying new stocks. And Tom just loved that. So I worked with his broker and we found him. Now the last thing I'm going to mention, number seven is Robo advisors.

And I got to be honest with you and prepare for the show.

I saw this and I'm kind of on the fence about it, but I wanted to put it out there as an option because I do have some clients that are doing and this is for somebody who wants a hands off approach. And what these Robo advisors do, they offer this automated, algorithm driven financial planning services with very low fees.

It's basically AI for investing. Now, Tom didn't like this.

He thought it was kind of hokey because he felt like he wanted professional management, but he didn't want those high costs. And the idea of these Robo things just didn't work for him. They might be saying, ralph, how did this all work out for Tom?

I'm going to tell you the rest of the story, and let me tell you by saying this, his transformation was remarkable.

We started implementing this stuff about five years ago, and Thomas, he was nervous at first, but as soon as he saw his money start to grow, his confidence grew, too.

And with helping with his broker, we set up a diversified portfolio that had all these different options, and they were all tailored to Tom's risk tolerance. Each of those decisions was made based on his risk tolerance and his financial goals. And we kept his costs low.

We focused on those low fee index funds and ETF's.

We used some treasury securities for the first thing for the fixed income portion of his portfolio, and we set up a couple of drips for long term growth. But here is the best part, and I mentioned this at the beginning because of Tom's frugal nature. It actually made him an excellent investor.

He wasn't tempted to jump on one of those get rich quick schemes or those highly fee active managed funds because he understood the value of keeping his costs low and letting that compound interest do its work over time. Now fast forward today, and Tom's portfolio has grown significantly.

He's moved it away from that passbook savings account, and he has a well diversified portfolio with low fees and a decent return. But here's the bigger picture to this whole thing. Tom's entire outlook on money has changed. Now, he's still frugal. He's still driving that old car.

He still pinches and saves and cuts coupons. But now he sees that frugality as a tool for building wealth, not just saving nickels and dimes and pennies.

He told me just recently, said, rap, I'm sleeping better at night because I know my money is working for me. And He's even started working with his kids and teaching them smart investing.

So, Hillary, and to all you listening, here's what I want you to take away from. This is my to do list for today. Number one, being frugal and being a good investor are not mutually exclusive.

In fact, your frugal mindset can make you a great investor. Number two, you got to start somewhere. So I'm going to recommend you start with these low cost index funds or ETF's.

These give you broad market exposure at minimum fee so they've got some diversification built in. You're not putting all your eggs in one basket.

Number three, don't neglect the power of high yield savings accounts and CDs for your short term savings and emergency funds. Maybe you're somebody who doesn't want to do that speculative investment in the investment market. You can do it right at your bank or credit union.

Look at the high yield savings accounts, look at those CDs and consider doing some laddering. It's going to give you a better return than what you'd get otherwise with that simple savings account.

Another thing, number four you could consider is those US treasury securities.

Like I said, I'll put a link to treasury dot gov in the show notes because that can be a conservative portion of your portfolio as well because you're really investing in the United States. And if you're a us citizen, I would hope you think, hey, we're going to continue moving forward.

Now there's a lot of debate about that, but at this point it's a pretty safe investment. Nothing we talked about, we talked about those drips. So look, in the dividend reinvestment plans for long term growth with low fees.

You're buying directly from the company. You don't have to have a broker intermediary. And the best part, now you're going to pay tax on those dividends. Just to be clear about that.

I didn't talk a lot about that. But you will pay tax on those. But that reinvestment is going to help that grow without much fees.

And like I said, if you wanted that hands off approach, consider that low cost Robo Advisor. But do your homework on that one. And here's the most important thing I can tell you.

If you don't listen to anything else I've said today, you got to remember that investing is about the long game. You got to stay consistent, keep your costs low, just like time learning and let compound interest work its magic.

Remember what the book of Proverbs 21:5 tells us, The plans of the diligently to profit as surely as haste leads to poverty. So your frugal nature, Hillary, Tom, has already made you diligent with your money. That is fantastic. You are ahead of so many people.

But now it's time to put that diligence to work and growing your wealth. And that's why I want to extend an invitation to everyone listening.

If you're feeling overwhelmed by your financial situation, maybe you've not done good with your frugal nature. Maybe you're a spender, whatever those things are, I can help you get on the right track, and I'd love to help you.

You can schedule an appointment with me. Just go to askraph.com, comma, click on the banner that reads, book a call with Ralph, and I will work with you.

I can help you get some financial peace. I'll help you move from living paycheck to paycheck.

One of the things I hear day and day and time and time again is that, Ralph, I feel like I'm living paycheck to paycheck. A lot of people say, ralph, I feel like I'm taking three steps forward and then I'm getting pushed four steps back. That is what we call bondage.

And I can help you achieve financial freedom and break free of that bondage. If you need help improving your personal finances, this is what I do. This is my mission field. This is my passion. This is my calling.

I can list ten other adjectives. Maybe you're listening to this and you're like, ralph, that's great.

I'm good on the personal side, but my business is really hurting, dude, I need help on the business side. I can help you there, too. I work with business clients of all sizes. I can help you organize your finances. I can help you grow your business.

Listen, at the end, my goal is to help you achieve all your financial goals. I do that by creating a personalized plan just for you, not some cookie cutter approach, not something that everybody's tried.

Do these three things and you're going to find peace, and you're going to find prosperity. It doesn't work like that. It just doesn't. You need to have a personalized plan.

Now, I do charge $150 for a consultation fee, which you might say, ralph, why am I paying you ahead of time? Well, here's my guarantee to you.

If I'm not able to create a personalized plan that exceeds your expectations and saves you money, I will refund your consultation fee. So don't forget to send in your questions to the show. After all, this show is all about answering your questions. It's why I call this ask Ralph.

And as always, you can submit your questions@justaskraph.com and who knows? Your question might be featured in the next episode, just like Hillary's.

Speaking of which, I want you to tune in tomorrow because we're going to be tackling the question what are nine pieces of money advice to ignore if you want to get rich? I mean, what are nine pieces of terrible pieces of money advice? And I've got some doozies for you. So you want to tune into that.

You don't want to miss it. And as I close, remember this, my passion. You can hear it in my voice. I want to help you achieve financial success.

I want to see you live out your dreams. It's what fuels me and what makes me get up in the morning and what makes me turn this microphone on and record this podcast show.

And I want to see you help. I want to help you grow in your faith. Because I know this. I've worked with so many people over the past, since 1994, I've been doing this.

I know that working together, we can master your finances from that Christian perspective. So as I always end the show, listen, stay financially savvy out there and God bless you.

Narrator
00:18:47

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