How to start saving -- even if you're broke

By Kathy Kristof

So your trust fund is AWOL, and the Rockefellers won't return your calls? You need to start investing if you ever want to retire.

The good news: Even if you've got only nickels and dimes, you can build a significant nest egg over time. The sooner you start, the better.

Choose an investment

You have three basic choices:

• A bank account is easy and accessible but won't earn much -- maybe 1% to 3% in today's market.

• Individual stocks, purchased through a discount brokerage, can give you high returns -- if you pick sagely -- or big losses. But because you don't have much to work with, you'll need to watch trading costs. And make a point of trying to diversify your investments over time.

• Mutual funds have the advantage of being able to pool the invested assets of many individuals and buy several stocks and bonds. If all you've got is $50 a month, you can start investing in a low-cost mutual fund and put your savings on automatic pilot.

Watch the fees

When you're investing small amounts, every little cost counts.

• If you're putting money in the bank, make sure there's no annual account fee.

• If you're investing in individual stocks,use a discount broker or a dividend reinvestment plan.

• If you're investing in a mutual fund, avoid funds with loads -- upfront fees -- and 12(b)1 marketing levies. Also watch the annual expense ratio. Ideally keep expenses below 1%.

Consider the wrapper

If you're investing for retirement, you might consider opening a Roth IRA.

That allows your money to grow on a tax-deferred basis, and if you follow the rules, all your investment income will be tax-free when you take it out.

Make it automatic

Have the bank, broker or mutual fund withdraw your regular investments directly from your account.

After a while, you won't even notice the money is missing. Yet your nest egg will be building.

Consider the long run

Even if you're investing only $50 a month, you can build a significant nest egg if you have enough time. Assuming an 8% average annual rate of return, that $50 a month would grow like this (before taxes and fees):

• In 10 years: $9,147.

• In 20 years: $29,451.

• In 30 years: $74,518.

• In 40 years: $174,550.

To see how your savings will mount over time, try MSN Money's Aim to Save calculator.

Published Oct. 28, 2008