Beginners Guide to Investing:What is Investing & How to Start?
THE RICHEST MAN IN BABYLONE, written by George S. Clason, is undoubtedly one of the greatest books ever written about financial and wealth knowledge. It is a good read for those who want to know how to spend, save and invest their wealth. In the book, Arkad tells his followers to make thy gold multiply, which means investing. Arkad says, “The gold we may retain from our earnings is but the start. The earnings it will make shall build our fortunes… To put each coin to laboring that it may reproduce its kind… a stream of wealth that shall constantly flow into thy purse… an income that continueth to come whether thou work or travel.” In this article, I will build from Arkad’s words and explain some of the ways of multiplying your gold (Investing)
What is Investing?
Investing is one of the cures of a lean purse, as explained by Arkad in The Richest Man in Babylone. But what does investing mean?
Investopedia defines investing as “The act of allocating resources, usually money, with the expectation of generating an income or profit.”
Let us look at investment from the angle of making money work for you. It is simple logic here, you work hard for your money, while the money works hard for you. But how do you make money work for you?
Let us look at these two individuals. The first individual earns 100 dollars every month. He spends all the 100 dollars on his daily expenses. Clearly, the individual has not put aside any of his earnings in an investment project. The second individual earns 100 dollars per month. He only spends half of his earnings and invests the rest in a project that promises him 50 dollars every month. At the end of the first month of his investment, the second individual is assured of 150 dollars, the 100 dollars from his salary, and the 50 dollars returns from the investment project.
Reasons Why You Should Start Investing
From the two scenarios, we can see the essence of investing. To be more clear on this topic, let us have a look at the reasons for investing.
1. Investing Will Earn You Returns
Investing funds on an asset or project involves a tradeoff since the investor sacrifices the current utility of the investment funds, otherwise called equity or capital, for some future utility. Pay attention to the following instances.
- You have money which you decide to invest in stock even though you have a serious craving for a new Audi. You have forgone the chance to buy the Audi, so you purchased stock that will earn you enough dividends or capital gains within a year. So, within one year, you can buy an Audi and still remain with enough cash to buy the same stock you purchased a year ago.
- You invest in government bonds which will benefit you in the form of regular coupons paid out over a specified period.
- You invest in real estate, forgoing utilities and expenses. You later benefit from your real estate investment through rental incomes and capital gains.
Looking at the three instances, you realize that in all, the investor forgoes existing expenses to channel funds to projects which later earn him rewards.
2. Retirement Plans
Most people invest because they want to cater to their retirement plans. Most people usually rely on their salaries during their years in employment, which becomes so difficult to sustain their lifestyles during retirement. Investing assures you of a constant cash flow in retirement. These days, the Financial Independence, Retire Early (FIRE) concept is common, especially among young people, and that is why they should strive to invest.
3. Tax Efficiency
Investments will also help to save from the tax man’s sharp two-edged sword. For instance, we have accounts such as the RRSP and TFSA, where taxes on investment returns are extremely low or nonexistent.
4. Investing Beats Inflation
There is always a question of investing or saving? With saving, your funds will lie idle in an account where they might be caught up with the waves of inflation. The 1000 dollars you saved last year might not have the same value this year. Inflation eats away the value of your money, thereby reducing its purchasing power.
The case is different with investing. For instance, you can invest in assets and projects capable of beating the forces of inflation. Such assets investing assets such as land and virtual assets like crypto coins usually appreciate in value. The price of a virtual asset last year is not the same this year because the price is ever increasing.
5. Investing Will Help You Meet Your Financial Goals
As you grow, so do your financial requirements. For instance, your youthful years will not require much. You are comfortable with a smartphone and some fancy clothes.
However, with time, you realize that you have to pay your bills, save or pay for your child’s school fees, provide for your aging parents and ensure that your family has the best. You realize that your meager salary cannot cater to all these, and that is why you have to invest in a project that will give you a steady flow of income to meet your financial goals or requirements.
How to Start Investing
After learning the basics of investing, it is now time to know how to start investing. The following are the key steps to investing.
In any journey, the first step is always the most vital yet challenging step to take. In the context of investing, saving is the first step to take. Saving involves sacrificing part of the present for the possibility of a better future.
At the onset, it is essential that you clearly define the goal for your savings. How much money are you willing to save? How long will it take to hit the required saving target? Answering these questions will help you have a clear goal to positively influence your priorities.
You must set aside part of what you earn to savings. Spending everything could only lead you to financial distress. It’s the money you save that will be used as the capital to finance your investments.
2. Have a Clear Investment Goal
From your savings, you now have the amount of money you would wish to invest. However, before investing, you must first figure out your investment goals. What is it you want to achieve? How long will it take to meet your investment goals? Where next do you take your investment after hitting the set goals?
There are always two categories of goals that you should consider when setting investment goals- the long-term goals and the short-term goals. Retirement is the most common long-term investment goal, although there are others. For instance, you might want to build a house, purchase your dream car, or go for a vacation at your dream destination in ten or twenty years.
With short-term goals, you aim to meet the objectives of next year or the following year. For instance, you invest because you want to buy a house next year or your dream car in three years.
3. Pick An Investment Project
This is another vital investment decision you should consider. The best investment project will make you successful and help you meet your goals within the shortest time possible. However, picking the wrong project could bring you a real headache. Here, you should do your homework and do it perfectly. You do not want to mess with your money, investing is a chaotic project that could bring you more pain than good.
Some of the common investment projects you should consider are the following;
· Money market funds
· Real estate investments
· Government bonds
· High-yield saving account
· Certificate of deposits
· Corporate bonds
· Mutual funds
· Exchange-Traded funds
· Dividend stocks
· Cryptocurrencies such as BitcoinsNon-current assets
4. Manage Your Investments
5. Ploughing back part your Rewards
If you want to multiply your income, part of what you earn should return to your investment. Eating every reward from your investment will not work for you.
As I conclude, I would wish to enlighten you on one of the most important principles of financial investing- All eggs in one basket principle.
As you know, investing comes with risks. If you do not diversify your investments, you lose everything in the event of a risk. Having multiple invetments ensures continuity of your rewards even after one of your investments is hit with a risk.