A BEGINNER’S GUIDE TO INVESTING
Invest. Investments. Investing.
You’re probably thinking these are words that belong only in the world of business tycoons, magnates and moguls. Of stock market crashes, real estate empires and billion-dollar portfolios, right?
The truth is if you happen to have your budgeting, savings, and debt in some kind of order, investing your money could very well be a viable next step in cultivating financial abundance.
All it takes is a little nous about how to put your savings (however small or large) to good use and make your money work hard and smart for you.
So, what exactly is investing all about and where do you start?
In our every day lives, we ‘invest’ in a lot of things, such as time, people, material items — all with the expectation of ‘getting something back’.
When it comes to finances, the definition of an investment is something you buy or put your money into, with the goal of getting a profitable financial return.
Although keeping your money in a savings account or term deposit might seem like a sure-fire and low-risk way to store your money and watch the bank balance grow, investing your cash elsewhere —such as in property or a share of another business or company — can result in an even greater net worth.
HOW CAN YOU MAKE MONEY FROM AN INVESTMENT?
When it comes to actually makin’ the money, it’s all about returns — or the profit you earn from your investment. Depending on where or what you invest in the first place, your returns are paid in a number of ways, such as:
- Interest earned
- Dividends, which are an amount of money paid by a company to its shareholders out of its profits
- Rent from an investment property
- Capital gains, which are the difference between the price you pay and the price you sell for
BUT ISN’T IT…RISKY?
Oh, there’s risk involved, alright — this ain’t about luck. Although the goal with both ‘saving’ and ‘investing’ is to grow your wealth, when it comes to investing, your potential losses are indeed greater. But so is the potential for profit.
For sure, none of us like the idea of ‘gambling’ with our hard-earned savings, but the reality is, there is no such thing as a risk-free investment.
Industries boom and then bust. Markets crash. Interest rates fluctuate. The list goes on.
There are different levels of risk attached to different types of investments — the higher the risk, the higher the expected return. This also means the more money you stand to make, the more money you stand to lose.
Exposing your savings to any level of risk will always be terrifying, so the key is to do plenty of advanced research, avoid ‘putting all your eggs in one basket’ and be prudent in choosing where to pool your money.
WHY DO IT?
The reality is that if you choose to keep your all of your cash in a shoe box under your bed, you will never have more money than what you save. Investing, however, opens you up to the possibility of generating additional income that isn’t based on something like a dollar-to-hour exchange, such as your salary.
One of the main advantages is that you can use shrewd investments as a means of saving and growing money that might be needed in the future, such as a child’s wedding or University education, a dream home or a comfortable retirement.
Perhaps the most motivating incentive to invest your money, rather than simply save it, is the prospect of not having to “work” your entire life.
It’s about creating a passive income: money aside from your work pay cheque that flows to you regularly, without much elbow grease.
It’s about putting your money to work — for you.
HOW TO DO IT
– Real estate and earning cash flow from rental income
– Stocks and bonds and benefiting as their value increases
– Businesses and earning a percentage of their growth or interest on your initial investment
The right savings or investment strategy for you will depend on how happy you are taking risks and on your current finances and future goals.
INVESTING IN SHARES
According to ASIC’s MoneySmart, investing in shares (also known as stocks, securities or equities) will make you the part owner of a company or business. Companies are listed on the stock exchange, meaning anyone can buy and sell their shares.
Benefits of buying and selling shares include the potential to make money through an increase in the share price over time, as well as a share in the company’s profits.
The risks of buying shares, according to MoneySmart, include:
– Share prices for a company can fall dramatically, even to zero
– If the company goes broke, you are the last in line to be paid, so you may not get your money back
– The value of your shares will go up and down from month to month, and the dividend may vary
It’s wise to consider investing in companies that look likely to do well over the long term and whose shares should increase in value over time. Learn more about the basics of investing in the share market, here.
INVESTING IN PROPERTY
Buying and selling property is a popular investment strategy, and so too is buying a property to rent out.
According to MoneySmart, some of the benefits of investing in the real estate market include the fact that property can be less volatile than shares or other investments and that you can earn rental income and benefit from capital growth if your property increases in value over time.
And of course, there are always associated pitfalls and risks:
- Rental income may not cover your mortgage payments or other expenses so you may have to use other money to cover these costs
- An increase in interest rates will increase your repayments and decrease your disposable income
- There may be periods of time where you don’t have a tenant and will have to cover all costs yourself
- If the value of the property goes down you could end up owing more than the property is worth
- There are very high entry and exit costs such as stamp duty, legal fees, landlord/maintenance costs and real estate agent fees
It is crucial to look for areas where high property market growth is anticipated and where rental income is high in comparison to the property value. Learn more about the basics of investing in the property market, here.
HOW MUCH DO YOU NEED TO START?
It’s a tough question to answer, because investing is at the mercy of so many variables — it depends on what you’re investing in, the level of risk you’re willing to take, and your personal goals and circumstances.
Let it be known, it’s a myth that you need a lot of money to be able to invest in anything.
Sure, the ‘cost’ of investing in real estate can be expensive, as it comes down to the price of the property, the percentage required for a home loan deposit and other associated costs such as stamp duty, mortgage insurance, realtor and body corporate fees.
But when it comes to joining the share market, your initial investment could be as little as $500.
Getting clear on your investment goals, the costs involved and your current financial situation will help you decide how much you want to invest. Just know that it’s okay to start small and those steady contributions will eventually add up — and (potentially) pay off in the long run.
Do you invest your savings? How do you do it and what have you learned in the process? Share with us in the comments below!