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So you know investing is important, but you haven't quite gotten around to it yet. Well luckily there's no better time to start than the present, except maybe 20 years ago, if you were even alive back then, but in this article what I want to share with you is how to invest for beginners in 2021 and how you can use investing to grow an appreciable wealth.
Before we get into how you can invest and what to invest in, I think it’s important to go over the why behind investing. You see I find that with anything in life, when you know the why behind what you do it makes it so much easier to remain consistent and ultimately succeed and when it comes to investing remaining consistent is one of the keys to success.
Why Invest?
The first of the three major reasons to start investing is to have your money work for you. You see many people slave away at their nine to five jobs and instead of having their money work for them they only employ the means of working for money. While this does make them money over time, it is definitely not the most efficient way to grow your wealth therefore you must pair your paycheck with investing if you want to add some commas to your bank account.
The second major reason why you should invest is to fight inflation. If you're unfamiliar with what inflation is, let me briefly explain. Inflation takes place when the money you possess experiences a decline in purchasing power. For instance, if a dollar this year bought you one loaf of bread and all of a sudden the price of bread went up then that means that you could no longer afford this same loaf of bread with the dollar because now your $1 has less purchasing power in the market. Over time, if you do not allow your money to grow, by for example stashing it away in a savings account, then you will continue to see your money erode due to inflation and ultimately your money will be less valuable than when you initially earned it. Luckily, by investing you can have your money grow at a faster rate than it erodes to inflation which means that your money will not just simply evaporate due to this economic phenomenon.
Finally everyone should learn how to invest simply because it will force them to learn more about the world of finance. All of the world's richest people invest time and energy in expanding their knowledge. From going to seminars to reading books, the rich focus their energy on expanding their knowledge and by starting to invest you too can start to gain expertise in this field. While you don't need to be a master in investing to make money in this way you still need to invest at least some time and gain more knowledge than you presently have if you're a beginner investor. Now that you know three primary reasons why you should invest let's talk about some initial steps you must take in your investing journey.
Your Starting Funds
I just mentioned that in order to start investing you must have some knowledge of the stock market or assets that you may want to invest in. However, besides the resource of knowledge you also need one other resource when beginning to invest and that resource is money. If you don't currently have money set aside to use to start investing then the first step you must take is to create a budget that will help you identify how you can find the money to invest on a monthly basis. What I recommend is that you create a budget with all of your sources of income and expenses and then identify where you can reduce your expenses to free up the cash you need to start investing. It’s generally a good idea to start small when investing and this will also make the task of cutting expenses easier allowing you to begin investing as soon as possible!
But what happens if after budgeting you realize that you just can't spare any extra cash? The next step is to identify means of earning extra income. Some practical ways to make this extra money can be by getting a second job or starting to freelance. Now I know it’s probably not appealing to add extra working hours to your already busy week but the fact is that without investing, the likelihood of you becoming rich is slim to none and this extra effort that you put in each and every week will yield you large returns in the future. Therefore once you secure the funds you're going to use to invest on a monthly basis we can then get into a few considerations that you must review prior to investing that hard earned money.
Investing Considerations
Before you sink your precious cash into any type of asset, you should assess a few important financial considerations. First, ask yourself if there are any other financial obligations that you need to attend to prior to investing. For instance, if you have a large amount of credit card debt to pay off then it is more advisable to pay it down first prior to investing. This is because consumer debt like credit card debt comes with much higher interest rates than the interest you would gain through investing therefore eliminating high interest debt should be your first move when getting your finances in order.
Next ensure that you have an adequate emergency fund set up with at least three to six months of living expenses. This this fund won’t yield you sizable returns, it can help you manage financial stress and allow you to avoid going into debt if an unexpected financial catastrophe were to arise.
Once you have these financial bases covered you must ask yourself what kind of investor you envision yourself to be. For instance, are you someone who is good with taking on a lot of risk or are you typically quite risk averse in your day-to-day life? Someone who is very comfortable with risk may not mind investing in riskier assets while on the contrary those that are more risk averse may want assets that are very low risk and that will not cause them too much financial stress by holding said assets.
One general rule of thumb you can use when you start to invest is the rule of 110. The rule of 110 states that you should take 110 minus your age and whatever that number ends up being should be the percentage that you invest into stocks with the remainder of your portfolio being invested in bonds. As you can tell, the younger you are the more heavily you would be invested into stocks which makes sense because if you were to suffer losses in your youth, you would have plenty of time for your portfolio to recover.
The final consideration you must keep in mind is how active of an investor you want to be. Some people want to be trading daily while others want to invest their money and not think about it again. As a beginner investor I recommend that you try and be as hands off as possible as more activity risks you making more mistakes and as you may already know, no one can accurately time the market therefore by investing in the right assets in the first place you will be able to yield respectable returns without much effort on your end.
As we’ve been going through all these considerations, you may have wondered if it's even worth your while to invest if you can only afford to contribute a small amount of money to your portfolio every month. Well, what you need to realize is that contributing even the smallest of amounts every month does two things. First, it gets you some skin in the investing game which means that it will prompt you to gain at least some financial knowledge which is definitely a step in the right direction. Second, it creates the habit of investing which you will need to have created whether you're investing $10 a month or 10,000.
How To Invest
Now that you have the money on hand to invest and have a decent idea of what type of investor you want to be, it's time to talk about how you can actually go through the process of investing your money. Let’s go through three ways that people typically invest so that you can decide what will work best for you.
The first method of investing is to invest through your bank. This typically involves setting up an appointment with an investment advisor and going through your investing goals. Be aware that whenever you are working with another individual, when it comes to investing, you are likely to pay higher fees to compensate for this person's time however as a beginner investor having your hand held through this process may not be such a bad idea especially if you feel you lack the financial knowledge it takes to succeed when investing .
The next option is to invest via an online platform. For example services like WealthSimple allow you to leverage their robo-advisors which will do most at the investing work for you. If you're unfamiliar with what a robo-advisor is then let me briefly explain to you what they are and how they work. A robo- advisor is an automated software that helps investors manage their investments. They typically work by having investors complete a questionnaire about their investing needs and goals and the robo-advisor uses this information to set up a portfolio on their behalf. While this type of investing is less personalized then if you were to work with a money manager, the benefit is that the fees when using this type of investment approach are generally quite low which can save you a ton of money if you are investing for decades upon decades.
The final option for investing is to set up your own online brokerage account and to manually select the investments you want to buy. Generally I don't recommend this for beginner investors however as you gain investing experience and invest more time into researching quality companies to invest in, this means of investing can be quite lucrative and again can offer you the benefits of lower fees given that you are doing all the work yourself.
What To Invest In
The second last step, and perhaps one of the most important, is to determine what you want to invest your money in. Having set up an investing account, you have access to investing in many different assets such as bonds, individual stocks and exchange traded funds amongst other securities and financial assets. Alternatively if you want to invest in real estate, you will probably be doing that outside of your portfolio, but it is definitely another viable asset to consider.
To ensure that you invest in the assets that best suit your own personal investing strategy, I want to share with you a brief description and some pros and cons of each of the financial assets I'd just mentioned:
Bonds: A fixed income asset representing a loan from an investor (you) to a borrower (bond issuer) which typically provides the investor either interest payments in the form of coupon payments or by buying the bond at a value less than its maturity value
Pros:
Less volatile investment for those who are risk averse
Can provide certain returns through their coupon payments or maturity date values
Con:
Lower potential returns due to the trade off of taking on lesser risk which can hinder the overall growth of your portfolio
Stocks: Fractional ownership of a company
Pros:
Higher potential for growth and can provide dividend returns as well
Higher liquidity than other assets like physical real estate or even bonds
Con:
Requires much more research and analysis in order to select stocks that will be profitable in the short and long term
Real Estate: Land and anything attached to it
Pros:
Offers the attribute of tangibility which can make investors feel more safe about their investment decision
Provides more control over the asset than when investing in stocks or bonds
Cons:
Requires more upfront capital to begin investing
Transaction costs can be expensive when buying and selling and can be illiquid which is problematic if you need to sell the property in a hurry
Exchange Traded Funds: Collection of securities that are publicly traded
Pros:
Offers the ability to diversify your investments without having a large portfolio
Generally comes with low investment fees
Cons:
Offers you less control in which assets you become invested in
Making Investing Easier
As I mentioned earlier in this article, the key to investing success no matter which asset you invest in is to invest on a consistent basis. One of the best ways to stay consistent is to make investing as easy as possible. In my opinion, the best way to do just that is to automate your investing process which you can do through the use of automatic contributions from your bank account to your investing account on a monthly basis. For example, you can set yourself up so that every month, a designated amount of money is transferred from your checking or savings account into your investment account where it is then invested into stock, a mutual fund or any other asset you set up for the money to be invested in.
By setting up this automation process, you gain two primary benefits. The first benefit is that you no longer have to remember to invest and can focus your time and attention on other pressing issues you have in your life. Moreover, automating your investing process will remove the emotions from investing because you will be contributing when the markets are low and high, rather than trying to time the market, and this will allow you to make your investing journey a lot less financially stressful. However one consideration you should keep in mind when automating your investing process is that if your investment account goes to withdraw money from your checking or savings account and for some reason you don't have the funds available, you could incur overdraft fees therefore always ensure to have a little bit of extra money set aside in your bank account to avoid these unnecessary banking charges.
Once you have these basics down pat, all you really have to do is to continue to invest over time and scale up your contributions as you can afford to. By doing this over a long period of time, you are sure to see your wealth rise and your proficiency in investing increase beyond your wildest imagination!