Part 8: Start Investing

Get your FREE sample of the 100 Steps to Financial Independence Book here

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 Independence100 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!

Get your FREE sample of the 100 Steps to Financial Independence Book here

Coming up next: Part 9 of the Journey to Financial Independence!

Day 21 / 31 Learn about Shares and Bonds

Day 21: Learn about Shares and Bonds

Day 21: Learn about Shares and Bonds
Day 21: Learn about Shares and Bonds

Today’s challenge will be a crash course on investing. Since there is a lot to go through and not much blog post length to use, let’s dive straight into this…

Shares

Any company is made up of shares and each share is essentially a very small part of a company. If you have a share, it means you own a part of that very business. The more shares you have, the bigger the part you own of that company.  Continue reading “Day 21 / 31 Learn about Shares and Bonds”

Step 52: Investing through Index Funds / ETFs

Step 52 of the 100 steps to Financial Independence: Investing through Index Funds
Step 52: Investing through Index Funds

It is now time for an introduction to the third main way of investing. As you were able to appreciate in step 50 on handpicking stocks and step 51 on mutual / collective funds, both ways have some very strong advantages, most notably the possibility of making lots of money on the stock market. Yet the opposite unfortunately is also the case and rather more likely than the first scenario… As we’ll see below, the third way of investing aims to find a middle ground between making money on the market and avoiding losses.

Index investing – an overview

Imagine looking at a long list of all the stocks and shares in a particular market – an index (such as the S&P 500) – and buying shares of every single company in that index in the same proportion as their relative size in the market. By buying all the shares of all the companies in the index, you basically copy the market and therefore will almost exactly get the same returns as the market average.  (It will normally be just a fraction below due to the small fees you pay). If the index goes up by 8% your return will be around 7.8%, if it goes up by 13% your returns will be around 12.8% etc. That’s what index investing does. Sounds simple and indeed it is simple.

Of course as a small investor you’ll never have enough money to buy shares of all the companies in the index, which is why index investing – like with mutual funds – pools money of different investors together in order to increase buying power. Continue reading “Step 52: Investing through Index Funds / ETFs”

Step 49: The Difference between Shares and Bonds

Step 49 of the 100 steps to Financial Independence: The Difference between Shares and Bonds
Step 49: The Difference between Shares and Bonds

Stock markets have a vast selection of stocks and bonds that can be invested in and before deciding what to invest in, understanding the main differences between stocks and bonds well is absolutely key if you consider getting in the stock market. Investors can decide whether they want to invest in just shares, just bonds or whether to create their own mix of stocks and bonds. With time, many furthermore decide to slowly reallocate their investments, so even if you start with a certain percentage shares and bonds, this needn’t stay as such for the rest of your investment life.

Here we’ll look at the main differences between shares and bonds from an investor’s point of view and how they both offer different advantages and disadvantages.

Volatility

  • Share prices vary more day-to-day but also over long periods of time: their value can increase or decrease fast.
  • Bonds are generally more price solid and fluctuate less over time and at a much slower pace than shares.

Continue reading “Step 49: The Difference between Shares and Bonds”

Step 47: Understanding Shares

Step 47 of the 100 steps to financial independence: Understanding Shares
Step 47: Understanding Shares

Here starts a new part of our 100 steps to financial independence, with this being the first step in a mini-series on investing.

If you are serious about money, it is worth understanding more about the stock market and at least get a basic idea of what it is and how it works, before you decide for yourself whether investing will be something you would like to start doing. Investing is often a long-term decision and depending on the risks you are willing to take, you might or might not feel that investing is the right thing to do for you.

Let’s start with one of the key components of the stock market: shares (also known as stocks) and find out what they are, why they exist and how they make or lose us money.

What is a share

A share is basically a very small part of a company. If you have a share, it means you own a part of that very business and the more shares you have, the bigger the part you own of that company. Continue reading “Step 47: Understanding Shares”