How to invest
To reach basically any financial gaol investing is almost every time necessary. Because it sometimes takes decades before you reach the goal you set yourself, and the truth is that your money will losses its value if you don’t invest it. Therefore time will work against you, but if you invest your money time will actually work with you. So if you want to become wealthy, care about your retirement, have financial goals or just want to get into investing. This article will give you a brief outline of what is to do and where you should start when you want to start investing your money. I will give you introductions into different topics that are important to start investing successfully. And then link you to different articles where I wrote about the described topic.
Why investing is important
If you want to reach a specific goal in your life and finances play a part in it, investing is important to get where you want to go. This is because if you let your money in the bank the whole time it will lose its value over time due to inflation.
The process which exists because of the fact that the FED is literally printing cash.
Which means that the value spreads over a bigger amount of cash. That courses every single dollar to worth a bit less. So to just keep the value of the amount of cash you have right now you need to get about 2% interest per year because this is the inflation rate.
All that combined means that time will work against you to reach your goal if you just let the money laying around in your bank account. But if you invest the money can actually let the time help you to reach your goal.
But to reach your goal you definitely need to set one first. If you set yourself a goal and then make a good plan to reach this goal you will actually achieve it. Therefore to set yourself a goal for how high your net worth should be by a specific age is key to achieve the things you want to.
I already wrote about the effect inflation has on savings above. I also told you that investing is key in order to actually profit from time passing by. But I didn’t tell you why this is the case. It is because of one phenomenon that was called the eighth world wonder by Albert Einstein once.
It is because of compound interest, the interest that you earn on the interest that you earned.
Through this effect that your money grows by a specific factor each time period when earning interest your money starts growing exponentially. It will become more, and more, and more over time. So you can actually profit from the time that passes by.
It will need some time before this effect really starts to change something. But if it has once started is getting ridiculous.
If you want to read more about his topic with an actual example of how absurd much $1,000 will become over time. You should my article I wrote about compound interest.
What Money to invest
You may think now that investing money sounds really great and you want to try it too, but you just don’t know what money you could potentially invest. The answer to this Question is as stupid as simple, the money you already have.
Let me further explain this. Chances are that you get money every single month, either from a job, your parents, your business or from anywhere else.
The reason why you say that you don’t have money to invest is that your spendings are almost the same or sometimes even bigger than your earnings.
This results in the fact that the money you have leftover a the and of the month is $0.
But if you want to invest something you need a gap between your spendings and your earnings. Most people think that they can reach this by increasing their earnings.
That is exactly the reason why people participate in the lottery, they are desperately searching for money. And the reason why this won’t work is the same reason why most lottery millionaires will lose their money faster then they earned.
And the same reason why your latest raise in salary didn’t make any difference anymore. The reason ist that your spendings adjust as soon as your income rises.
Three levels of personal finances
For me there are three levels. The first level is fairly easy for most people and just include earning money.
The second level then is for the people to hard, even though it just includes keeping the money you literally earned just one step before. But this is the level where most people already fail.
The third level is even a bit harder than level two. It includes letting your money work for you.
But another truth is that no one of the levels is hard if you know who to do it.
My key to all level to was knowing where my money goes. I didn’t have any clue why I don’t have any money in the bank again or why there is more money than I expected. I just reacted to what stood there.Every once in awhile I spent everything when I had more than I thought or I didn’t buy things I wanted to have if I had to less.
Most people act like this for there entire life. To change this you need to know where your money comes from and where it goes to. To do this, you should start to write this down and set yourself goals on how much you spend in a specific category each month.
If you have the problem I described that arent able to keep the money that you earn, you need to read the article I wrote about budgeting here:
What investing means
If you invest your money, in any possible way there is one basic principle that stands behind this. It is the principle that also banks use to manage their assets.
The principal is that you give your money to someone else to work with it. And therefore you get interest for giving your money to others. It is always the same since the beginning of humanity.
If you buy bonds you are giving your money to the government or a company just because they are telling you that you will get more money back when time passes by. Even if buy shares from a company it is the same principle. You give them your money so they have more money to work with and you can participate because they are going to worth more and so are your shares.
But why would someone give you more money then you gave them? It the same reason why someone pays you money if you work for him.
They are only giving away their money because they can earn more money if they do it then would if they don’t. And then we are reaching a critical point in what I said earlier. You are investing in a company and it aligns with the principal I wrote above. But what is the company doing with this money to make more than they are going to pay for your money?
They invest it, but they don’t follow the principle I explained earlier most of the times. The principal I explained applies for most people out there who don’t manage their own business. This is the first type of investing.
Categories of investors
Most private people fall into the category I explained. They are individuals who want to get a bit interest on their money. While the other group of investors are people who don’t have any money but see opportunities by fixing problems. They then borrow money from others. And pay them an interest to have the capital and fix the problem they see.
I will give you an example. Person A gives money to person B because person B wants to buy a house from person C. Person C wants to sell the house. After all, the cash flow from the property is way to low for the capital that is bound in it. Person B sees this problem also, but he has the solution to just renovate the house and then single rooms out to students, but he has no capital for this. Person A has “a bit” money laying around and gets approached by person B with the plan.
Then person B borrows money from A to buy and renovate the house from C. Then person B pays everything back to person A overtime then owns the house. Person A is happy because she got interest on the money laying around and person B is happy because she was able to get this opportunity. Person A in this example is the normal person that just wants to get a bit of interest on his money. B is the other type of investor that sees opportunities in problems but don’t have any capital.
The difference between them is they get paid for a different thing. While person A gets paid to have the money that is necessary for the operation Person B gets paid for his ability to fix problems.
Where to start
You might want to start investing right now because you are impressed with what I told you. But there is something more than just invest your money. It is clearly important to invest the money that you have leftover and you don’t need for the next few month.
But the fact that you invest your money alone doesn’t make you a financially intelligent person. If you have gone through the steps I told you about earlier you now have a good base. You have money left over at the end of the month and you know why investing is extremely important. But there are two steps that come before you even should start investing.
The first one is to build up an emergency fund. This means that you put 3-6 times your monthly expenses on the side just to have in the of an emergency. My first instinct when I heard about that was clearly. “But if I don’t invest that money it’s going to lose value because of inflation”. This thought is completely right.
Also right is the fact that you probably have to pay more in interest if you use a short term loan to cover your emergency expenses.
If you think that this doesn’t apply to you because an emergancy doesn’t happen to you, you are wrong. I hope that you’re right but statically proven is the fact that we all are going to have something unplaned in our lives sometimes.
Credit card debts
34% of Americans had a major unexpected expense in the last year. So if you aren’t one these chances are that in this or the next year you are going to be. But the fact that really got me was the one that 39% of all Americans can’t cover a $1,000 emergency with their savings.
I mean $1,000 isn’t that much. And if every American would have saved up 3-6 times their monthly expenses or a bit more they wouldn’t have to pay any interest on these debts now. If you want to dick deeper into the topic of why emergency funds are that important and why you should have one. Read this article about the topic where I also talk about how much should be exactly in your emergency fund.
The second step before investing is to pay off all high-interest debts you have. This shouldn’t be that hard for you if you followed my advice on budgeting. But why should pay those debts off?
Because if you do you look at the interest that you are paying for these now as earnings. This is because the money you use to pay off the debts will result in you paying less interest on the debt. So if you have $1,000 debts now and you are paying 10% interest one these you pay $100 per year.
If you would have the money to pay off this debt and you could decide between investing them. And get a dividend return of 10% on these or paying your debts off, the result would be the same. If you choose the investing you would earn $100 per year. And this would cover the interest that you have to pay on the debts. Or you chose to pay your debts off which would result in the fact that you don’t have to pay the $100 in the interest anymore.
The problem with this example is that you probably pay more than 10% interest. And you won’t find a stock that will pay you 10% dividends over decades. Therefore to pay off your debts is actually even more attractive.
If you want to read about the two exact systems you can use to profit from paying off your debts. You should definitely read my article about why you should pay off your debts:
And in the case, you read through the whole thing and you still have doubts I think that reading why you should invest is important for you too:
Thanks for reading!
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