In my article, “What is the best way to grow your money,” I said that your hard-earned money has the potential to maximize its growth simply by investing it. But you ask, “What does it mean to invest and how do I start?” Investopedia defines investing as “the act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.”
If you are a beginning investor and you do not have any idea how to start, then you need to start with the basics. So here are some of the basic principles of investing for beginners that you should understand before investing your money.
A. First things first, get your house in order.
Before you even think about investing, you need to know where you are financially. What is your current net worth? What is your monthly income and expenses? How much debt are you carrying? Do you have enough savings?
Know where your money goes each month by tracking your spending habits. Think of ways to reduce your expenses, pay off any existing debt, get yourself health and life insurance and build up an emergency fund to cover three to six months of expenses. That way, you will be on sound financial ground and able to invest well.
B. Invest in knowledge. Never invest in anything that you do not understand.
People almost always end up losing their life savings when they invest in things they do not understand. So always do your homework because as they say, “knowledge is power.” If you’re considering to invest in stocks, research companies until your understand them. But if you think you will not have time or do not desire to learn all these things, consider mutual funds, especially index funds.
You may also want to seek professional assistance. If you do not know where and how to start, get some help. Find a trusted financial adviser who is willing to teach, not an adviser that is interested only in selling. And even if you let others handle your financial affairs, remain involved to some degree in order to make sure that your money is being spent wisely.
C. Begin investing now, don’t procrastinate.
The best time to begin investing is NOW because an early start can make all the difference. An early start is sure to provide a long time horizon for compounding to show its true benefit for the investor. The sooner you start the easier it is to accumulate and build your wealth.
Do you have a large sum of money sitting in your bank account? Invest some of it right now!
D. Invest regularly.
The key to building wealth is investing regularly. But supposed you have some money and you want to invest it, should you invest it all at one time or divide it into smaller amounts and invest them each month? Obviously, the more you invest, the more you will eventually make.
However, this does not mean you should invest a large amount of money at once. Research shows that your money has the potential to earn more when invested regularly, that is, every month or a set periods throughout the year, as you do not have to worry about timing the market. Just be confident that bad months will be outweighed by good ones over the long term.
Regular investing is also beneficial both for small investors in slowly building up their portfolio and those who have a large sum to invest but are fearful of going all in at once.
E. Invest long term.
When it comes to investing, time is your best friend. But how do you decide what constitutes short term vs. long term? Generally speaking, an investment time frame of more than five years is considered long term. Why is it better to go long term? We know that the stock market is extremely volatile; meaning, it can be up one day and down the next. But history has shown that over an extended period of time the trend is almost always upward.
An investment period of more than five years provides ample time for the market to bounce back from a more prolonged down time. So if you think you’ll be needing the money in less than five years, it’s a bit too risky to invest it.
F. Diversify your investment
You probably heard it many times over that you should diversify. Diversification is the practice of spreading your investment around different types of securities or assets to minimize the risk and volatility of your portfolio over time. In other words, you should “not put all your eggs in one basket.”
Why should you invest?
Investing can help you save for retirement, college tuition, starting a business and any other financial goals you might have. Investing is one of the most powerful tools people have in their financial arsenal, yet most people keep putting it off.
Not investing means your money is not working and earning interest and your wealth is not growing. On the contrary, the current value of your money is being eaten away at by inflation. This means that the money you have now in the bank won’t be worth as much in a year’s time.
I have been in the workforce for more than 20 years and my biggest regret so far is not investing at the time that I started working and was earning a regular income. My only excuse is that I had no idea about investing back then. What about you, what’s your excuse today for not investing? What’s holding you back?