Tired of living paycheck-to-paycheck, working two jobs or putting in extra hours to make ends meet? Then you may want to learn how to make your money work for you by capitalizing off your income through strategic and wise investment.
As you get older, learning how to invest your money becomes one of the most important lessons in life. The good news is it doesn’t require a college degree or high IQ to get started. In fact, all you really need is basic business knowledge and the confidence to make your plan a reality. For your convenience, Centric has helped gather the necessary steps to starting your investment portfolio. Take notes and start building your wealth!
So, What Is Investing?
According to Dictionary.com, investing is defined as, “putting (money) to use, by
purchase or expenditure, in something offering potential profitable returns.”
Most people consider investing challenging, but believe it or not it’s actually quite simple; all you’re doing is setting your money up to work for you—simple right? You don’t have to take a second job or work those overtime hours—something most people dread—to increase your earnings.
There are many different ways to make an investment, which includes putting money into stocks, bonds, mutual funds, real estate, or even starting your own business, which doesn’t always require a large amount of money to start.
Many of us believe that investing is a lot like gambling—super wrong. Gambling is putting money at risk by betting on a result that isn’t certain with the hope of winning big money, like the lotto. Part of the confusion between investing and gambling may, however, come from the type of investment some people choose to use.
Knowing The Difference Between Saving and Investing
Though most people tend to think that saving and investing are the same, they fail to realize the difference. Putting your money into savings represents money that is supposed to be secured, not losing any of its value. On the other hand, investing is for money that is supposed to be generating more, risking the chances of your account value decreasing.
Why Should You Invest?
Well, the question is really why wouldn’t you want to invest? It’s clear that everybody wants more money to increase their personal freedom, sense of security and the ability to afford all the things they want in life! Nobody wants to work for his or her entire life; investing is a great way to secure your future.
To have a better understanding, when you invest the mathematical term that is often used is Compound Interest, also known as Compounding. This calculated method transforms your working money (invested cash) into a powerful income-generating tool; it generates the earnings on an asset's reinvested earnings. For it to work, two things have to happen: the re-investment of earnings and time. The more time you give your investments, the more you are able to accelerate the income potential of your original investment. This helps takes the pressure off of you and this is how your money begins to work for you.
To demonstrate, let's look at an example we got from Investopedia.com:
If you invest $10,000 today at 6%, you will have $10,600 in one year ($10,000 x 1.06). Now let's say that rather than withdraw the $600 gained from interest, you keep it in there for another year. If you continue to earn the same rate of 6%, your investment will grow to $11,236.00 ($10,600 x 1.06) by the end of the second year—get it? To read more examples read The Concept Of Compounding.
Now that you have a general idea of what investing is and why you should do it, it's time for you to learn how to start your investing journey in five brief simple steps.
Step 1: Get Your Finances In Order
Before investing it’s important for you to go through your finances. It would be foolish of you to start an investment without figuring out your current status. You don’t want to dig yourself in a hole you can’t climb out of. With your monthly cost of living, credit card balances and student loans, those incomes alone can eat into the amount of money left to invest. You can gain more insight here: Invest On A Shoestring Budget and Should I Invest Or Reduce Debt?
Step 2: Learn The Basics: Types of Investments
You don't need to be a financial expert to invest, but you do need to learn some basic business terminology, which will help better prepare you to make smarter decisions. Get a thorough understanding on the differences between stocks, bonds, mutual funds and certificates of deposit (CDs). Learning financial theories such as portfolio optimization, diversification and market efficiency would also be useful. Learn more by reading Investing 101 Tutorial.
Step 3: Setting Your Investment Goals
Once you’ve established your investing budget and learned the basics, it's time for you to move forward and set your investing goal(s)— long term ones, hopefully. Every investor comes from a different background with different needs so what may be best for you will depend on your age, position in life and personal circumstances; safety of capital, income and capital appreciation are some things you may want to consider. Learn more in Basic Investment Objectives.
Step 4: Recognize Your Risk Tolerance
If you were to lose a major amount in your overall investment value, would the lost break you and bank account? Before you go about making your decision on which investments are right for you, you need to know how much risk you are willing to accept. Your risk tolerance will differ according to your age, income requirements and financial goals. Read more on risk tolerance in Determining Risk And The Risk Pyramid.
Step 5: Find You A Broker or Advisor
As a newbie, we suggest seeking guidance from an advisor that is right for you; the amount of time you’re willing to spend on your investments and your risk tolerance. When choosing a financial advisor you may want to consider factors such as their reputation and performance, how much they plan on communicating with you and what additional service they can offer. For more useful tip read Shopping For A Financial Advisor and Picking Your First Broker.
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