Investing some money in the stock market can be a great way to get your finances working for you long term, as you work towards building a portfolio to supply you without another income stream. If you’ve never invested before, this might sound like a scary new thing to learn, but these days you can invest in low-risk investments with even just small amounts of money, so as long as you only put in money you don’t need (and not your entire savings), investing MIGHT be an adequate way to build up your assets and net worth further.
Part 8: Start Investing
Generally speaking, there are two types of investments that make up most of the stock market: stocks and bonds. Stocks or shares represent a small part of the company. Whoever owns shares of a company essentially owns part of that company. Shares give shareholders dividend payments at specific intervals (for example yearly or biannually) based on profit results.
Bonds on the contrary represent loans taken out by a company. If you buy a bond you essentially lend money to a company. Throughout the lifespan of the bond you will be paid interest and at the end of it you will be returned the original amount of money that the bond was issued for.
Both stocks and bonds might with time go up in value, meaning that if you decided to sell these assets you could make a bit of money. Unfortunately the opposite might also be the case: they could go down in value in which case if you had to sell them after their value has gone down, you would lose money.
When it comes to investing your money in the market, there are three main ways of doing so:
- You can pick and choose your own stocks and bonds to invest in. Handpicking your own investments gives you a lot of flexibility and means you’re in (almost) complete control of the process: which company to invest in, when to buy and when to sell. It does of course mean you need some knowledge as to how to make these decisions.
- A second option is to invest in mutual funds where a fund manager makes all of those decisions for you. Mutual funds often have high associated costs and fees however and therefore aren’t always the most efficient way to make money on the market.
- A third way to invest is via index funds which is a way to proportionally invest in all the companies of a specific index. This type of investing doesn’t require you to have specific knowledge and often has very low costs.
None of the above options are without risk: investments can always go down in value and whilst you can make money on the stock market, it is just as easy to lose money. That said, as long as you take calculated risks and invest in relatively safe investments, putting money into the market can be good opportunity to. build your wealth.
It’s worth finding some time today to check out the investing options that might be available to you, what their minimum monthly required contributions are and what their fees or costs are. This gives you a much better idea of what investing might look like to you.
Lastly, before ending this quick intro into investing, let’s look at an investing guideline that has become known as the 4% rule. This rule is based on extensive research done by Trinity University where researchers found that if you have an investment portfolio of a certain value, and take out no more than 4% annually, your portfolio will nearly always sustain itself due to market increases, meaning the increase in value balances out the money you take out. Practically speaking this means that if your investments are worth $60,000, you can take out $2.400 each year without your portfolio going down in value. Or if you build a portfolio worth $500,000, you can take out $20,000 each year! That might even be enough to live off without needing any further income? Unfortunately, whilst the 4% rule is a great initial guideline, it doesn’t always hold up, especially not in times of a recession, so before you think all you need to do is invest and then live off the proceeds, you’ll likely need a contingency plan for when there is an economic downfall scenario.
Investing can be a great way to build and maintain your wealth, but it is also complex and there can be great risks involved. This blogpost is just an introduction to the topic. Before you go off and invest all of your savings, please make sure to educate yourself further with blogs, books and / or podcasts on this so that you don’t take any unnecessary and irresponsible risks.
The above is an adaptation of part 8 of the 10 parts in the guidebook to Financial Independence: 100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!
Coming up next: Part 9 of the Journey to Financial Independence!